U.S., Banks Near A Plan to Freeze Subprime Rates

The Wall Street Journal (excerpt) ^ | November 30, 2007 | Deborah Solomon and Michael M. Phillips

[HAL9000]

Excerpt -

WASHINGTON -- The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations.

An accord could reassure investors and strapped homeowners, both of whom are anxious as interest rates on more than two million adjustable mortgages are scheduled to jump over the next two years. It could also give a boost to the Bush administration, which is facing criticism for inaction amid the recent housing turmoil.

The plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies including Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. People familiar with the talks say the individual members have agreed to follow any agreement reached by the coalition, which is called the Hope Now Alliance.

Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.

~ snip ~

[DB]

Aren’t they the underlying vehicle used by congress to loosen the credit requirements for many of these loans? Basically where sub prime originated?

[RockinRight]

No. I’ve originated mortgages for 8 years. Fannie Mae and Freddie Mac do mostly “A-paper” loans. There is an element of “subprime” in what they call “Expanded Approval” (Fannie) and “A-Minus” (Freddie) but that’s not a huge percentage of their portfolio, and, at least in my experience, are mostly fixed-rate loans.

Yes, these two entities have loosened guidelines over the years primarily as they’ve gone to automated underwriting, that has some odd matricies in the software that approves loans well outside the traditional debt to income ratios...but that’s not what is being targeted here, for the most part.

I don’t know for sure, but I would expect most of what is being targeted here consists of subprime 2/28 and 3/27 ARM’s, which have a fixed period of 2 or 3 years respectively, then adjust. These have never been purchased by Fannie or Freddie.

[DB]

The banks are simply trying to minimize their losses. If deferring a scheduled rate increase means that they don’t have to foreclose in a down real estate market and they can continue to get the borrower to service the loan then the bank comes out ahead. That’s not rocket science either...

[tubebender]

And if anything goes wrong with the cast-iron sewer line, just damn.

In some cases a liner can be threaded through that cast iron to save digging it up...

[DB]

Thanks.

[DB]

I used cast iron for the waste plumbing in my new house. It isn’t in the ground. It was to minimize the noise.

[Rightly Biased]

ping

[Cap Huff]

I will politely ask you one more time. Just what do you mean by your comment to me?

[hripka]

FROM
http://reggiemiddleton.typepad.com/reggie_middletons_perpetu/2007/11/us-banks-near-p.html

This raises a lot of questions. The credit derivatives based on these loans will now face lower payments. If market rates float higher, and these mortgages and contracts are forced downward, how will they effect valuation? Will the insurers be on the hook for the difference? How exactly do you determine who gets the rate freeze, and who doesn't? Moral hazard is imminent. Some will be better off falling behind to get the rate freeze, or will they(?)

[central_va]

What’s so hard to understand?

[Goldwater and Gingrich]

I’m in Phoenix and what the housing bubble has done is make a $160,00 home cost $400,00! I got in before the bubble but if I was 25 years old and trying to buy I would be screwed.

The truth is housing prices are way out in front of wages. There will be an adjustment the only question is how large.

I like the idea of a 20% down morgage at 6.5% on a $180,000 home over the “new” idea of 0% down on a $400,000 home at 5% with bad credit.

[Vet_6780]

Beginning of a trend or isolated incident ?

By Alistair Barr, MarketWatch

Last update: 5:33 p.m. EST Nov. 29, 2007

SAN FRANCISCO (MarketWatch) -- Florida halted withdrawals from a $15 billion local-government fund Thursday after concerns over losses related to subprime mortgages prompted investors to pull roughly $10 billion out of the fund in recent weeks.

The State Board of Administration met earlier Thursday and voted to immediately freeze withdrawals, spokesman Michael McCauley said.

The decision shows how far this year's subprime-fueled credit crisis has spread. Florida's Local Government Investment Pool, which had more than $27 billion in assets at the end of September, is like a money-market fund that's supposed to invest in ultrasafe assets to provide participants with a secure place to stash spare cash. But even these types of funds have been hit by the widening crunch.

"It's spreading into areas that people didn't expect and this is a good example," Richard Larkin, a municipal bond expert at JB Hanauer & Co., said.

There will likely be more state funds in similar predicaments because they use similar investment guidelines, Larkin and others said.

[Goldwater and Gingrich]

My house is 1952 also.
The wires are cloth covered plastic. The cloth has almost turned to powder and the plastic is vary brittle. It is best not to move the old wires if you can.

Add a sub box on the side of the house and pull some new wire in. The box is cheep like $50.00 and you won’t have to mess with the old wires.

[Pining_4_TX]

Oh goodie! The government is going to wave its magic wand and make everything better!

[hunter112]

If freezing subprime rates helps keep these people out of foreclosure, then why don’t the mortgage companies just do it without waiting for government to act?

It's like unilateral disarmament, nobody wants to go first, and risk being the only party to do so. If every lender were to sit down and agree to do this, they face antitrust law. However, if they do it in partnership with the government, they don't have this problem, plus they get a possible enforcement mechanism against any stray lenders who try to renege on the deal.

The lenders all know that 1) Interest rates are coming down, and the government will use this agreement to put pressure on the Fed to make sure of that; 2) Jacking up the rates to the full extent allowed by the adjustable rate mortgage agreements will send a lot of their collateral into foreclosure; and 3) They already have their hands full with declining home values and borrowers walking away from houses that are worth way less than is owed on them, even on the fixed rate loans.

[aroundabout]

Generally 6-9 months. The sub prime thing has been going on for well over a year. I believe it is 80% media hype and wishful thinking.

[ReignOfError]

We had a fire in 1973, and the wiring was upgraded then. So I have solid vinyl insulation, not braided cloth. It's sill two=conductor ungrounded, but at lest it's knd of sturdy.

Add a sub box on the side of the house and pull some new wire in. The box is cheep like $50.00 and you won’t have to mess with the old wires.

I like that idea. Adding another box rather than ripping out the exiting one wouldn't mean I'd have to cut off all power and stay in a hotel. I'm pretty good at DIY, but I draw the line at electricity, But come to think of it, i could rub a lit if the wire and let an electrician examine it before it goes "hot."

[CutePuppy]

Lowering the Fed rates right now is not only useless, but counterproductive. It only reinforces the cycle, because people are not going to buy anything until the rates stop to go down and when they know that cycle ended. In other words rate cuts only prolong the downward agony and slow down the buying incentives, which in turn drags down the housing prices.

Either they shoud do a large one-time 100-125 basis points cut and say it’s over, or decide to stop right here and declare it’s over - and help banks to recapitalize some other way, if that’s even necessary.

Right now, the only people benefiting from interest rate cuts are speculators like George Soros, Bill Gross and Warrent Buffett who all are betting against the dollar and prod the Fed to cut the rates for their own benefit. Gross also benefits because it makes his bond portfolio rise in value.

[dalereed]

“But it makes perfect sense for lenders to delay their reset dates in order to reduce the bleeding they’re currently doing.”

How can they reset rates on loans that they don’t own and have been packaged, sold, and resold.

The holders of these packages will sue the banks out of business.

[Moonman62]

Lowering the Fed rates right now is not only useless, but counterproductive. It only reinforces the cycle, because people are not going to buy anything until the rates stop to go down and when they know that cycle ended. In other words rate cuts only prolong the downward agony and slow down the buying incentives, which in turn drags down the housing prices.

I still think a quarter point cut will be better than no cut because it will help the overall credit market some. Rates are still low when one looks over a 40 year period. People are also waiting to see what will happen to credit markets and when foreclosures will level off, not to mention all the scaremongering in the press. A person can also get a loan now and refinance later if rates keep going down.

Either they shoud do a large one-time 100-125 basis points cut and say it’s over, or decide to stop right here and declare it’s over - and help banks to recapitalize some other way, if that’s even necessary.

I agree but I think the probability is very low that anyone at the Fed will break tradition of cautiously moving way behind where they should be. Bond yields indicate that the Fed does need to lower rates around a point or so. My position is the longer they wait the more they'll have to lower rates later, which does reinforce an unnecessarily large credit cycle, and is inflationary.