I know it is a bit early to do too much analysis, and until the plan is formally revealed in detail it is difficult to assess the costs and or benefits of a new proposal, however, on the surface, the plan introduced today by President Bush to freeze adjustments to Sub prime ARM Loans seems to be a fairly good step in the right direction. But I wouldn’t go so far as to say that it is enough.
According to reports on CNN.com President Bush will unveil a plan to institute a 5 year freeze on Adjustable Rate Mortgage increases for certain home owners. If you have an ARM don’t get too excited just yet. Apparantly this freeze will only be made available to those Subprime Borrowers who are current on their monthly payments. Any homeowner who is more than 30 days late, or has been more than 60 days late within the past 12 months will be ineligible. The plan, as reported, is only eligible for those loans set to adjust in 2008, and will only be available to those borrowers who are deemed unable to afford payments at the adjusted rates.
So, what do I see that I like and what do I see that is insufficient? First, I like that we are making some progress. I typically don’t like to see too much involvement from the Government in business affairs, but I also understand that if the current trend continues we may be facing the worst economic crisis this country has had since the Depression. I am glad to see the various parties sitting down and putting something together.
That being said, talk about a messy operation to administer. Remember that loans, once written to a borrower, are then sold off to various servicing companies which in turn bundle those loans with similar loans in order to sell them on the securities market. Remember also that it is not uncommon for securitized mortgage notes are frequently divided up and sold to multiple investors. So, who makes the decisions for those homeowners who are affected? Do they re-enter the underwriting process? How do they determine who takes the biggest hit in terms of profits? Does anyone really think the investors are going to simply accept lower payments than what they are contractually entitled to receive? It just seems extremely complex to me.
Not to mention the fact that on the surface it would appear that with the freeze available only to those who are current, in other words, those who can make their payments, this new program really isn’t helping those most negatively affected—the people loosing their homes.
Here is what I don’t understand: When someone gets a sub prime mortgage it should be understood that they have 2-3 years in most cases to fix their financial and credit situation. It is also understood in the mortgage industry that the vast majority of those borrowers will not do much to improve their situations, meaning in 2 or 3 years they will need another sub prime loan. The problem isn’t that the interest rates are adjusting; the problem is that there are no more lenders offering sub prime loans to those people. Many of them still need to refinance to utilize equity to pay off higher interest credit cards. Just because their mortgage may not adjust for a while doesn’t mean that they don’t need to refinance. And, to be frank, our economy could use some of those people about now.
As I have said before, simply lowering interest rates will not fix the mess, and allowing sub prime borrowers to have a few extra years will no doubt save a few homes from foreclosure, but it will not help the economy get out of the mess we are in.
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