The Times has a couple of interesting reports today on the Bush administration's plan to help distressed borrowers. First, this article about people who won't be helped by the plan. An excerpt:
Jason Bosch, president of Home Center Realty in California’s hard-hit Riverside County, [commented] “We were selling $300,000 homes to people who could only afford $175,000 homes,” he said. “Even if you freeze their payments, they still can’t handle it.”
If they knew the borrowers couldn't make their payments, why were they selling them the homes?
The second article goes into more detail about the program and includes a considerable amount of criticism. An excerpt:
Nonprofit housing groups that try to help troubled homeowners renegotiate mortgages were underwhelmed by Mr. Bush’s plan.
The Greenlining Institute, a housing advocacy group in California that began raising alarms about subprime loans nearly four years ago, estimated that only 12 percent of all subprime borrowers and only 5 percent of minority homeowners would benefit from the rate freeze. The Center for Responsible Lending, a nonprofit group that supports homeownership, said the freeze would help only about 145,000 people.
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Some Wall Street analysts were equally unenthusiastic. “This plan only really amounts to a set of recommendations for lenders that is sure to meet some resistance from investors” in the mortgage-backed securities, wrote Paul Ashworth, an economist at Capital Economics.
The teaser freezer plan is not bad as far as it goes, but is grossly inadequate if it is touted as a comprehensive solution. First, the current foreclosure crisis has very little to do with ARM rate resets and payment increases; 70% of 2005 and 2006 subprime ARMs now in default have not reached reset dates, and the plan does nothing for borrowers who are already delinquent. Early payment defaults, i.e. homeowners falling behind on poorly-underwritten loans in the first 12 months, will continue to be a major contributor to mounting foreclosures.
Second, the plan rejected FDIC chair Sheila Bair's proposal to convert subprime ARMs to fixed loans, and instead suggests merely deferring rate increases for five years. This aspect really illustrates the greed of ASF and the industry negotiators. The only borrowers who will face the postponed reset (usually from about 8% to about 11%), are those trapped in their loans for five more years by declining property values or marginal credit. The beneficiaries of this squeeze are the residual and lower tranche investors, who want to extract economic rents from the worse-off borrowers, even at the cost of precipitating foreclosure losses that wipe out all interest and typically 40% of principal. The borrowers stuck in temporarily-modified loans after five years are probably the most in need of permanent relief.
I see two positives (they are small) in the plan. First, giving servicers permission and encouragement to modify loans in groups, without re-undewriting borrowers or even contacting them, can potentially save thousands of homes, and that is a good thing. Second, the reverse steering of borrowers, i.e. encouraging subprime borrowers to appliy for FHA refinancing, is a welcome turnaround from the past subprime servicer tactic of encouraging delinquent borrowers to get yet another subprime mortgage.
The permission to charge investors for counseling and modification costs predates this plan, but it is also a very useful tool, that counselors need to know about and demand.
As always, the complexity of the issues do not lend themselves well to sound bite descriptions.
Alan White
Posted by: | Saturday, December 08, 2007 at 02:10 PM