Above: Yields on 10year Note, which is used to calculate mortgage rates
Posted on 11/25/2007 8:41:13 PM PST by DeaconBenjamin
Arnold Schwarzenegger is once again leading US states to action on policy reform ahead of lawmakers on Capitol Hill.
The California governor, who this year introduced significant environmental and healthcare reforms, has now moved to slow the rate of home loan defaults brought on by the collapse in the subprime mortgage market.
Mr Schwarzenegger’s deal with four of the state’s biggest mortgage lenders – Countrywide Financial, GMAC, Litton and HomeEq – is “nothing less than jaw-dropping in its ambition and implications”, according to Matt Fellowes, a fellow with the Brookings Institution.
Under the scheme, the four lenders will extend for a “sustainable” period their low introductory rates on adjustable subprime loans to homeowners at risk of foreclosure.
That would address a serious headache for policymakers – the large number of adjustable-rate home loans taken out at low introductory rates and due to reset at higher rates in the next few years.
Adjustable rate mortgages (ARMs) make up about 30 per cent of all US home loans and are more prevalent in the low-quality subprime market. More than $350bn (£170bn,€236bn) in ARMS will reset to higher rates in the next 18 months.
Analysts and ratings agencies alike say these resets will increase the frequency of loan defaults as falling house prices leave borrowers with negative equity and no chance of refinancing.
That could hit consumer spending, with knock-on effects on the US and world economies.
Attempts to avert such a scenario by encouraging mortgage lenders and servicers to renegotiate home loans have not gone as far as policymakers would hope.
While investors generally agree that in many cases everyone is better off if a loan is restructured rather than going into default, there is great resistance to standardised work-outs based on simple criteria such as type of loan and status of borrower.
Many investors feel such standardised solutions will benefit borrowers who can afford to make higher payments, and want to proceed instead on a case-by-case basis, albeit with the aid of standardised systems and databanks.
Hank Paulson, US Treasury secretary, last week expressed his frustration at the slow pace of mortgage restructuring in the private sector and urged mortgage servicers to adopt a more standardised approach.
Randall Kroszner, the senior Federal Reserve official on housing matters, has also advocated a more standardised approach.
Federal officials are seeking further information on the California deal and could not indicate whether there might be any potential to extend this specific solution either state-by-state or nationally.
However, there is interest in the approach. “It has the potential to save tens of thousands of Californians their homes and perhaps hundreds of thousands of homes across the country by proving . . . that the public and private sectors can collectively work together,” Mr Fellows said.
Michael Krimminger, special adviser for policy with the Federal Deposit Insurance Corporation, which guarantees deposits held by banks, says the plan will be an important catalyst for other states.
“The influence that the governor of California can bring to bear means there will be a big push for this [across the US],” he said. As the companies involved service loans across the US, the plan is “very scalable across the country”.
California has not promised any financial or legislative incentives to the lenders, says a spokeswoman for Mr Schwarzenegger. “This is a public-private partnership that does not involve public dollars.” Instead, the agreement is backed by “safety in numbers”.
“If only one of these companies was modifying its loans . . . they would lose out to the competition and [house] prices would keep falling. It would be a double whammy,” she said. However, with four mortgage lenders representing 25 per cent of subprime mortgages signing up to the plan, the risk to the lenders has been minimised.
The agreement with the lenders will cover only those homeowners “making timely payments”. Beneficiaries will also need to prove they cannot afford a rate rise.
suppose it is somewhat better than nothing.
Seems like a good idea, but the mortgage companies are moving very slowly if they wish to operate on a case by case basis.
By the time that works it way through the system, many shakey homeowners will be slipping underneath the waves.
I wonder if that sustainable period will be measured in days, weeks, or months.
Hard to say. I was expecting to read that Arnold had proposed a megabillion dollar bond issue to prop them up. This is certainly much better than that.
It’s in the best interest of all concerned, lenders and homeowners, not to trigger a wave of foreclosures, so I doubt whether he had to twist their arms very hard. I don’t see it as “jaw-dropping,” unless I’m missing something.
But if the crisis gets worse, it may not help much.
sounds like Arnie smoking the heavy stuff again.
The “sustainable period” just has to be until the borrower has positive equity in her house.
Then foreclosure becomes profitable.
More like standard operating procedure (including Arnie taking credit for things he didn't do)
'Victory' declared, credit is claimed
But lenders say governor's deal to get help for at-risk homeowners 'nothing new'
Gov. Schwarzenegger proclaimed "a very, very big victory for the people of California" this week in getting lenders to help homeowners avoid foreclosure, but the deal he announced apparently isn't new at all.
The governor took credit Tuesday for negotiating an agreement with mortgage lenders Countrywide Financial, GMAC Financial Services, Litton Loan Servicing and HomEq Servicing to help keep subprime borrowers in their homes.
Those four lenders, however, told The Bee on Wednesday that their lending policies haven't changed and the governor didn't get them to agree to anything new.
"The governor's principles already are in alignment with what we already do," said Larry B. Litton Jr., who heads Litton Loan Servicing. "Nothing's substantially changed."
But that's not what Schwarzenegger and his staff are telling the public.
(snip)
We have a winner!
None of this really matters. California (and most other) home prices are going to keep dropping because they got too high. Nothing is going to change that. This “deal” just allows the financial institutions to be able to claim that they are “trying” to fix the problem. It can’t be fixed and they know it.
The long term risk here is that politicians destroy the mortgage market by somehow invalidating contracts unilaterally. They’re getting dangerously close to advocating just that.
Once that happens, try selling a mortgage bond to an institution again. No one will buy paper where the terms are subject to change by politicians, because the politicians always rule in one direction; against the lender. Well, maybe they’ll buy the paper...at a price, but that will mean higher rates than would otherwise be the case.
These four lenders represent 25% of the market and they want to only change terms on certain loans (able to pay today’s rate, but not the reset rate) so the vast majority of people who screwed up by borrowing short-term to buy a long-term asset are going to end up screwed one way or the other.
Longer term, we need suitability rules for mortgage bankers, just like in stocks, only a lot more specific. For example, they can’t assume that a rising home price will make the deal work out, nor rising family income. If you can’t make the reset payment at origination, you shouldn’t get the loan in the first place. But for now, this is all water over the dam and it’s too late to stop the carnage that is already underway.
Many investors feel such standardised solutions will benefit borrowers who can afford to make higher payments, and want to proceed instead on a case-by-case basis, albeit with the aid of standardised systems and databanks.
I think renegotiating the loans is probably the more realistic solution to this problem, but there are several significant questions. Investors want to reset the loans on a case by case basis, but there are about 2 million loans which will reset next year. All of these lenders have shed thousands of employees earlier in the summer. Who is going to be doing all of this paperwork? If this is not getting government money, or a government requirement, then why is the government involved? If it is in the investors best interest to accept a lower return rather than foreclosure, why do they need the government to step in?
-—The California governor, who this year introduced significant environmental and healthcare reforms, has now moved to slow the rate of home loan defaults brought on by the collapse in the subprime mortgage market.-—
The defaults aren’t the resulting from the collapse of the subprime morgage market, they’re the cause of the collapse.
Boy, what suckers my wife and I are. We bought a home we could afford and abided by the terms of the mortgage.
My wife and I too. We bought a house that we could afford and are paying it off at double the rate. The faster you pay, the less interest you pay. How dumb can you get, huh?
These people that bought more house than they could afford or refinanced to cash out equity will be paying nothing but interest for many years. The only thing that may save them is another prolonged period of inflation.
Good solution? Not likely. It’s a giant markdown of assets no matter how you look at it.
“Attempts to avert such a scenario by encouraging mortgage lenders and servicers to renegotiate home loans have not gone as far as policymakers would hope.”
You are attempting to push a housing crash into the future by taking a markdown now. That means fewer premiums to cover what is already a high default rate. So not only do you book less income, but you also forestall selling those homes to someone who will actually pay.
In other words, you can’t get something for nothing. Government elites no squat except lining their resumes and pensions.
Government elites KNOW squat except lining their resumes and pensions.
My Hooked On Phonics classes sometimes let me down.
Above: Yields on 10year Note, which is used to calculate mortgage rates
How can a lawsuit stop a foreclosure? What judge would have jurisdiction over it?
Yes and no. You would not have to sell many of those homes if the folks were paying current rates. For instance the 5/1 ARM is now 5.50% (6.45% APR). Considering many of these subprime debtors are having to cover 7, 8, 9% or higher loans, quite a few would be able to keep making payments at current standard rates.
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