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FDIC chairwoman Shelia Bair raised the ire of the anti-bailout crowd when she proposed that lenders be required (or encouraged) to “freeze” subprime adjustable rate mortgages at their initial “teaser” rates to ensure that homeowners who can currently afford the mortgage payment are not forced in to foreclosure by the exploding interest rate change that occurs at the end of the short-term fixed-rate period. The idea is simple enough, if the initial interest rate on the loan was 4.75% for 2 years and then adjusts to a much higher rate, simply eliminate the adjustment and people continue to stay current on the loan. This, in turn, reduces foreclosures due to unaffordable mortgage payments caused by absurdly high interest rates.
Of course, consumer groups are coming out of the wood work to support this type of initiative.
“We support Chairwoman Bair’s recommendation,” says Alan Fisher, executive director of the California Reinvestment Coalition. “In our meetings with major lenders, this is what we have asked them to do. We will continue to call for a moratorium on foreclosures of subprime loans until recommendations like Chairwoman Bair’s are in place. Without adoption of such loan modifications California will experience an economic Tsunami.”
The California Reinvestment Coalition along with the Woodstock Institute, Neighborhood Economic Development Advocacy Project of New York and Community Reinvestment Association of North Carolina welcomed Chairwoman Bair’s proposal after warning regulators and Congress for years that irresponsible underwriting standards among America’s largest lenders would eventually fuel a crisis in the housing market.
I have some major problems with this proposal. First, this simply exacerbates the current problem with housing, which is mainly, the unsustainable price of homes in America. If home prices return to a level of affordability this situation rights itself, people start buying homes, start fixing them, and start moving up again. But it must start with a return to affordability of the underlying asset. Keeping people in homes on artificial credit terms only props up a bubble that is clearly a major economic anomaly and risk to the economy. Let’s take the pain now and get on with it.
Second, it punishes the fiscally responsible. How would you like to know that you chose a loan with an interest rate 1.5% - 2% higher than the teaser rates on some of these adjustable rate mortgages because you saw the dangers with them; only to realize that by doing the responsible thing you’ve been penalized as your neighbors with the ARM loan are getting a sweetheart modification to keep them at the low 4.75% they started with? I think this defines moral hazard.
Most importantly however is the problem clearly articulated in an (unwitting?) comment from Sarah Ludwig, spokeswoman for one of the groups supporting this bill:
“The solution Chairwoman Bair proposes will help a large subgroup of homeowners who were sold hybrid loans and can afford to pay the introductory rate for the life of the loan,” said Sarah Ludwig, Executive Director of the Neighborhood Economic Development Advocacy Project (NEDAP), in New York City. “Too often, however, even the introductory rate is unaffordable, and servicers will need to ensure that loans are modified on terms that are affordable to borrowers.”
Ms. Ludwig keenly points out that even with a modification these subprime adjustable rate loans will still be unaffordable at the teaser rates they were initial offered at. AND WHY IS THAT? Because people over-stated their income 50-150% on their applications to qualify for these short-term ARMs. That’s why! People can’t afford the payments at the teaser rate, because they could never afford the property. What should lenders do? Give them the home for free? If they over-stated their income on the loan application to qualify for a 2-year teaser rate ARM and now can’t even afford that payment they can’t be saved and shouldn’t be saved!
If you lied on your loan application why is the lender supposed to bail you out with a loan modification? Are they supposed to help you out because you defrauded them? And, based on my unscientific survey of people looking for loss mitigation this is exactly the problem they are faced with. Even taking in to account a favorable loan modification they would still be in a negative monthly cash flow position. Lenders won’t modify a loan where people continue to be in the red each month because they know they are only delaying the inevitable.
People were able to live in this negative cash flow situation over the last 5 years by repeatedly tapping home equity to support their monthly cash bleed. Now, even a modification won’t help because they aren’t able to strip equity out of their home to fund an unsustainable lifestyle.
In summary, modifying loans on a case-by-case basis seems to make the most sense. A moratorium on adjustable rate mortgages seems ill-conceived and bound to help fewer people than it will end up hurting. What do you think?
Morgan,
There is no way to do this on a case by case basis. Unless lenders and servicers are wiling to hire back the 100,000 people they just laid off for $10 a hour and turn them into loss mitigation speciailists. That’s just not going to happen because we are on the verge of ALL of these institutions going down in a ball of flames. Just like 1929.
Weren’t these people given loans by these same lenders you are speaking of. A free home. What?
How did they get the unaffordable mortgage in the first place? With he help of a licensed professional that has an ethical and fiduciary duty for the utmost care of their client. NEWS ALERT! That RARELY happened and homeowners were place in toxic loan they can’t refinance out of.
Morgan, I have a lot of respectr for you and you may be one of the few that looked out for their clienst best interests and not your pocket book, but you are one of the VERY FEW I know.
You expect every homeowner to understand a mortgage and the legalities?
I know and see people in the business that can’t even explain half the BS in a set of loan docs and we can’t expect most of these homeowners to understand these “legal” papers.
I am on the front lines daily. Fielding calls and emails from homeowners who are trying to refinance out of these toxic loans that have just adjusted 3,4,5% higher and they cant refi, they cant get a loan modification. These are the same borrowers that QUALIFIED for a REAL MORTGAGE using REAL UNDERWRITING GUIDELINES for the lenders to DETERMINE if the borrower that is APPLYING for the REAL LOAN can AFFORD that there MORTGAGE that they are APPLYING for at the BANK using UNDERWRITERS that are EMPLOYED by the LENDER to MAKE SURE that there BORROWER can PAY THEM BACK once they LEND THEM THE CASH.
You see, every loan that is originated has to be sold to the consumer before it becomes and origination. Many loans that were sold over the last few years, as you know, were adjustable rate mortgages. Consumers never say, ” Please put me in an ARM that adjusts in 2 years.” No they were “SOLD” these loans. Here was the typical sales pitch by licensed professionals. ” I know that you didn’t want an adjustable rate mortgage but that all you qualify for. But don’t worry Mr. Jones, I’ll be able to refi you in 2 years and get you into a fixed loan, no problem. This is just a band aid loan because you have tarnished credit, can’t prove income and you don’t have a dime to your name.”
Do you think these same homeowners would have been sold the loan if it went like this? ” Here’s your loan Mr. Jones. It’s and adjustable rate mortgage that will shoot through the roof in two years, your payment will double, you’ll be screwed financially, the bank will eventually foreclosure on you, ruining your credit for 7 years and your life will leave you because she’s sick of you drinking cheap scotch on their dirty linoleum floor.”
I guarantee that if that was the case then we wouldn’t be where we are at now. But what can we do? We can’t turn back time and we must look forward to solutions.
That solution is a massive loan modification of all of these toxic mortgages.
Homeowners that speculated and were given loans that they never should have been in will walk away or be foreclosed on. I accept that and they will deserve their fate. But just to let the other 50-75% of homeowners lose their homes and investors lose their investment is just ludicrous.
We need to push for loan modifications from lenders.
Your unpopular asset will be worth nothing if you don’t modify these loans. People can’t refinance and there is zero equity in their homes. Most can’t afford the new adjusted payment. Many will default and be foreclosed on. Most of them could have had loan workout arrangements that would have saved their homes and lenders/investors tens of thousands of dollars. But daily many more become a statistic in the foreclosure madness.
Who wins there? Where is the sense in that? How many more months can we go before it affects every homeowner in America?
We don’t have time to do it on a loan by loan basis. I believe it’s way beyond that. It’s now about saving our economy and saving it from going into a major recession.
Thanks for letting me rant and keep up the good work!
Moe
You nailed it. Affordibility must return to the housing market for it to EVER correct the way it needs to. Yes Sheila Bair, there will be lots of crying and lots of pain, and guess what?? There are no short cuts to fixing it–The market must correct on its own.
Freezing people’s ARMS at the Teaser rate is the most F’d idea I have ever heard–you will just delay the inevitable, and punish the financially responsible citizens of this country. The message will be–if you can’t beat em, join em…Join the corrupt and crooked morons running our country and running our economy into the ground….Dont worry about it–Our kids will pay for it.
Good God, What has happened to our Country?!!! So very very SAD.
I agree with you in that this would punish the wrong people. I do agree that with those that can, something should be worked out to have them remain in their home..especially if the interest rate on their loan originally places them close to or at the fixed rate currently (if the person started with a ARM that was 5.75% and now resets to 11% well that person should be allowed to easily refi if payments at 5.75% were always current). I also agree that this should not reward the person who was an investor because with investments come risk. It does no one any good to have 1)excessive vacant homes and 2)people having their credit ruined.
If the borrower cannot qualify refinancing their existing note, then why should they be rewarded by freezing their teaser rate. To freeze the teaser rate would be rewarding someone who really should not own the property. I deal mostly with “A” paper and realize the flip side to the crisis. Subprime home owners who cannot refinance have done little to increase their subprime credit. Since, SIVA quidelines have tighten up to get investors buying shrt term notes this freeze will surely keep them away. I’m not trying to be mean here but you have to look at the complete totality of the whole situation!
This whole subprime mess is turning political, as I predicted it would in April.
If any of us believe that we’re going to escape without at least 4 new federal laws coming our way over the next several years, you’re nuts.
Our elected officials are under the assumption that they’ll be held accountable to “do something” and they THINK, unknowingly, that everyone is going to be in favor of stupid ideas like this one.
So who will have more pull with their congressmen and senators….the subprime homeowners OR the “no bailout” crowd? Be a voice and start the dialogue with your elected official now.
Send him/her an email.
If not, don’t whine when your taxes go up.
Every one of these borrowers they want to save with an arbitrary loan term modification, i.e., rate freeze, have a vested interest in the future mortgage market. Unless they plan on dying in that house. As such to arbitrarily freeze the rates will kill any future securitized mortgage market. Who’d be dumb enough to buy a contract whose terms are “fluid.” Who would write a contract with someone society has deemed to be incompetent to be held to the terms?
True these contracts won’t pay off but default risk was the investor’s problem from the start. The fact that it was poorly rated by the “rating” agencies is getting dealt with, i.e., no one trust the rating agencies anymore.
Also, what do we do about the Option ARMS and Alt-A reseting in 2009-2012. Do we freeze these people at a negative amortization or I/O rate? Who will invest in mortgages if Treasuries give a better return?
If anything happens it has to be with terms that weed out the bad actors. Such as showing occupancy for preceding 3 years or since purchase if less, documentation of income on original loan (at least for period since loan inception), and only on primary residence. Maybe suppress adjustment to the 30-yr fixed rate with a 5 yr prepayment penalty to avoid churning. That would permit real longterm homebuyers to stay in their home and let the investors and liars take their chances.
Two things will happen if Ms. Bair’s plan were implemented:
1) No more ARMs would be available from lenders… ever. No lender would take the chance that this might happen again where they’d be stuck with the lower interest for the life of the loan.
2) Fixed loans would cost more, to recover the “losses” lenders would take on the current set of “fixed ARMS”
Or maybe that’s what she’s trying to achieve….
Moe,
What you are talking about is commonly referred to as Moral Hazard. As in, if you could not afford a home, it is not the taxpayer’s, bank’s, or anyone else’s responsibility to bail you out of your ill-timed, ill-conceived decision. To think that I have to bail out a FB, because they bought more house then they should have is crazy. Please, let’s stay away from rewarding the inpatient, big-box house buyers and not give ANYONE a bailout.
Certainly, if I’m going to be spending a quarter million dollars, I better damn well understand what I’m signing.
The MARKET needs to correct itself, without another government bailout only meant for the lenders who line the politicians pockets.
I’m glad to read other people who agree with letting the home owners move who cannot afford the house they’re living in currently. A freeze on teaser rates only rewards the home owner who never should got the home in the first place. I been in the business for over 5 years as a loan officer and none of my clients are facing foreclosures. Even my subprime clients were educated about the dangers of 2/28, 3/27, or pay option arms. I know AE’s who push these products but its up to me to have the respect of my clients and my DRE license!
Non of your clients are facing foreclosure. Wow, what a great LO you are. So you seriously know for a fact that all the loans you have sold, that no one is in foreclosure. Do they call you every day and give you up dates?
This is far more then a correction. This is about our whole economy and if you guys are going to sit here and say the market needs to correct itself and just let these 2 million homeowners get foreclosed on, then you’re in for a big suprise when this is all said and done. The economic implications are more than I think any of us can comprehend.
We are talking about trilllions in losses and depressed real estate, not much consumer cash flowing in the economy. Are you even watching the way the stock market is reacting to this. What about the world?
Maybe you all should have some talks with real economist who know what the hell is happening right now. We are HEADING into a major recession. Whether you want to face the facts or not. It’s your choice.
Most comments on here are based on greed and not reality. Sad but true.
Simple Moe,
I data base my clients and keep in contact via email, birthday cards, etc. Its called building relationships and building referrals. Moe, most of my clients are “A” paper and investors. Try it sometimes, really.
Can I refi out of my affordable 30 year fixed into some toxic mortgage, get some sweet cashback and then get a sweet, sweet government bailout?
I don’t think that I should be penalized for being fiscally responsible and living within my means.
I am reading all of this and I am really confused. 4 years ago, I got one of those ARMs at around 6% with lower than average credit scores. I was told that after 2 years of current payments I would be able to refinance into a fixed rate because my score would increase. Well, in two years my score did increase well above the guidelines that I was told I needed. When I went in to refinance, I was rejected because the guidelines had increased dramatically and I was stuck. Now after payment arrangements, modifications, etc. 2 years later, I have filed bankruptcy and my payment has almost doubled from $658/ mo to $1200/mo. Now my credit score is so terrible. I can’t even rent. There are 4 other houses on my street that have been on the market for over a year. I don’t think that even selling is an option. And rent for a house the size I need will cost as much as my current payment. So for alot of us, there is absoutly no option at all other than to go down with the ship. Maybe not fix the loans at the ‘teaser’ rates, but find a reasonable competetive rate that is afordable to the people that were lured into this financial hole.