The subprime rate freeze plan announced by the Bush administration last week was clearly designed to win votes. I just wonder whose.
The number of people who will meet all the complicated criteria necessary to qualify for a five-year rate freeze on their subprime adjustable-rate mortgage is relatively small. Estimates range from fewer than 100,000 to 600,000 nationwide. To put that in perspective, Oakland has about 400,000 people.
The percentage of people opposed to the plan appears to be high, based on informal polls.
Business news site CNBC.com asked visitors, "Is the Bush administration's idea to freeze mortgage rates necessary to insulate the economy from the subprime crisis?" Only 13 percent said "Yes - The danger to home values and the economy warrants government intervention," while 81 percent said "No - the marketplace should be left to resolve the issues on its own." That's not surprising coming from a business audience. The rest said it's not yet clear.
The Chronicle's Web site, SFGate.com, asked, "What do you think of the mortgage-rate freeze plan?" Of the 1,758 responses, 8 percent said it's good because it keeps people in their houses, and 89 percent said it's bad because it bails out reckless banks and borrowers. The rest said, "Only a fraction qualify, why not me?"
Based on flood of e-mails I've gotten in response to my Thursday column on the plan, some people believe the government should not be meddling in contracts between borrowers and lenders. Some say the housing and mortgage markets should be set free to correct themselves as quickly as possible, the same way a forest fire, while devastating, clears out excess and sets the stage for new growth.
George Topor of Corte Madera wrote, "I have yet to hear a homeowner state that it is their fault they are in this mess. Yes, there are definitely hardship situations. But what about personal responsibility for your actions? I have been scammed, a fairly small amount, and I have lost money on investments. My fault. I paid."
This letter sums up what a lot of readers said: "I'm a software engineer in Silicon Valley and my wife is a professor. When we moved to California we were alarmed at the cost of homes and how much of our combined income it would take to get into one. We chose not to get caught up in the mania, and I like to think that it was the smart, rational, reasonable and responsible decision. I have a certain amount of sympathy for those who may lose their homes, but rewarding such reckless decision-making seems like a bad policy. Homes in the Bay Area are largely overpriced because of all the speculation and investing that happened over the last few years. I will be truly disappointed to find out that my wife and I worked hard to get the jobs we have, impeccable credit and a good income and cannot afford a $600,000 home, whereas through government aid somebody who couldn't be bothered to read the documents they were signing is helped to keep what they should not have had in the first place."
What many find irksome is that the freeze seems to help those who gambled the most.
Conceptually, the plan aims to help only subprime borrowers who are mostly current on their adjustable subprime mortgage today, but could not afford it when their interest rate adjusts and could not refinance into another loan.
It does not aim to help subprime borrowers who are making their payments today and could afford them after the reset, or who could refinance into a more-affordable loan. It will not help people who already behind in their payments. It does not try to help borrowers with good credit scores or who have substantial equity in their homes.
To qualify for the rate freeze, you must have taken out a subprime adjustable-rate mortgage between Jan. 1, 2005, and July 31, 2007. You must be facing your first interest-rate adjustment between Jan. 1, 2008, and July 31, 2010, and the payment increase must be at least 10 percent. Your mortgage must have been sold into a securitized pool of loans. You must be living in the home.
Your FICO credit score must be less than 660 and less than 10 percent higher than it was when you took out the loan. That puts you in the bottom 30 percent of Americans based on your credit score.
Also, your first mortgage alone must be for more than 97 percent of your home's value, meaning you put less than 3 percent down, or the value of your house has fallen significantly.
People who meet these criteria will be eligible for an automatic or "fast-track" five-year freeze. People who meet some but not all might be eligible for a freeze on a case-by-case basis.
A fascinating though somewhat technical piece on the blog Calculated Risk surmises that this "convoluted and counterintuitive plan" was designed to stay "on the allowable side" of the contracts (called pooling and servicing agreements or PSAs) that govern how securitized loans are handled.
Loan servicers - the companies that collect mortgage payments and work with borrowers on behalf of investors who own the loans - are given only so much leeway when it comes to modifying loans for struggling borrowers. If they step outside those bounds, they could be sued by investors. The loan pool could also lose some of its tax and accounting advantages.
"As it happens, the PSAs for these deals will nearly universally contain language that says loans can be modified only if they are in default, or default is imminent, or default is reasonably foreseeable. Therefore, what the plan does is simply provide a kind of standard definition of those categories for the vintages of loans in question," the report says.
That's why borrowers who could refinance their subprime ARMs are never eligible for these "fast track" modifications. "It is hard to say that default ... is reasonably foreseeable for a loan that has a refinance opportunity," the report says. "This isn't about solving the borrower's problems permanently in the best possible way. ... It's about solving the problem while staying inside the security rules," the report says. (For the full story, go to http://www.calculatedrisk.blogspot.com and scroll to The Plan: My Initial Reaction.)
Because the plan is written so narrowly, it might not spur the flood of litigation that some were expecting. Treasury Secretary Henry Paulson said, "The risk of litigation should be manageable." But it also might not help all that many people.
"The amount of relief that is going to be realized from this is going to be minimal," says Bobby Lazenby of Lazenby Associates, a Las Vegas consultant to companies that securitize loans.
"The couple people who actually do get their loans frozen, it'll mean something to them," he adds. "It will make headlines, it looks like people are trying to go after this."
Lazenby says investors might not sue over this plan, but "they will complain about it. You never want to give up any ground at all in a field you think that's yours. Once you give up ground, what's next? If Democrats gain the White House, you can see this kind of action being taken much more aggressively," he says.
But even if investors don't sue, they could become less willing to buy loans in the future, and that could make it harder to get mortgages.
"If the federal government is going to come in, flex their muscle, pass legislation or intimidate investors into changing the terms of the deal they've agreed upon. ... the impact on the financial markets is going to be immeasurable," Lazenby says.
G. Marcus Cole, a professor at Stanford Law School, agrees. "There are not likely to be substantial objections from investors" because the plan is voluntary and a small number of loans would be affected, he says.
"It strikes me as more of a rhetorical or political device than a financial device. It provides some type of cover for servicers that want to take that step but need some source of authority," Cole says.
But it also sends the wrong message, Cole says. Two of them, actually.
"It gives a sense that the government ought to be engaged in rescuing borrowers in this particular category. It also conveys the message that foreclosures are a bad thing or unhealthy. Foreclosures are a natural part of market discipline. If you take out the impact of foreclosures you have reduced the stick that stands behind the commitment to pay on the mortgage. I would think this would make the markets nervous. This is very interventionist, even to the extent it's voluntary."Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at firstname.lastname@example.org.
See: http://www.sfgate.com/cgi-bin/article/comments/view?f=/c/a/2007/12/09/BUPHTQB1F.DTL for comments to this article.
I suppose Professor Cole would opine that Mortgage Servicing Fraud is a natural part of market discipline too! Shhheesh!