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Source of Title Blog

The Big Freeze of 2008
by Robert Franco | 2007/12/03 |

The "Big Freeze" this winter does not refer to a particularly cold winter - rather it refers to a freeze on interest rates of subprime loans. Mortgage industry executives are working on a rescue plan that would freeze interest rates for up to seven years on some subprime loans.

According to Reuters:
Details over which mortgages would be considered for an automatic interest rate freeze of five to seven years are still sketchy. The source said that initially, only subprime loans with two- or three-year periods of low "teaser" rates would be considered, but more traditional subprime loans with longer fixed-rate periods could also be modified.

...

Federal Reserve officials estimate that 2 million mortgages face resets and as many as 500,000 of these could lose their homes.

Deutsche Bank said in a report on Friday that the population [the] plan is aimed at -- owner-occupants with at least some equity and facing their first reset -- comprises 1.2 million loans valued at $258 billion, or one third of outstanding "first-lien" subprime loans.


The problem with such a blanket plan is that it may invite lawsuits from investors who bought mortgage backed securities valued with anticipated interest rate hikes. Changing the yield of their investments at this point could be a sticking point that could nix any broad-reaching automatic fix. Furthermore, though the goal is to provide relief to many borrowers who may not be able to afford the payments on their mortgages once the interest rates adjust, a blanket freeze on interest rate hikes may benefit some borrowers who are capable of making their payments as agreed.

Source of Title Blog ::


The fact that such a drastic measure is being considered demonstrates just how serious this problem is likely to become. If this attempt at relief fails, borrowers may still find some help if the Emergency Home Ownership and Mortgage Protection Act of 2007 passes. That law would allow bankruptcy courts to modify the terms of a loan in a chapter 13 bankruptcy. (See Bankruptcy: The Subprime Borrowers' New Best Friend) Unlike the blanket freeze on interest rates, the bankruptcy provisions would effect more than just the interest rates - it would also allow the bankruptcy court to reduce the principal balance and modify the length of the loan - but it would be on a case by case basis and only available for those who seek bankruptcy protection.

Regardless of the manner in which the relief is provided, it will be difficult to find something that is fair for the homeowner, the lender, and the investors. It will be interesting to see what happens in the first six months of 2008 as the peak of the wave of ARMS are set to adjust.

Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com



Rating: 

Categories: Foreclosures, Mortgage Industry, Subprime Lending

640 words | 2390 views | 8 comments | log in or register to post a comment


Yeah, I tend to agree with you. I w...
Yeah, I tend to agree with you. I wrote a short piece over the myClosingSPACE blog about this but my focus was more on the consortium of lenders, credit counselors, etc called Hope Now that are pushing this freeze. I am not sure how good of an idea this is. On one hand it would help homeowners in trouble on the other hand it would be an artificial propping up of the industry and IMO delaying the inevitable. 
by Mark Pilatowski | 2007/12/03 | log in or register to post a reply

So here I am, a homeowner who does ...
So here I am, a homeowner who does not have a subprime mortgage (but a regular, fixed rate one), and unemployed (a title officer) as a direct result of this mess, can't find a job, and will probably end up losing my home. Yet I'm not going to be eligible for any bailout, now, am I ? 
by anonymous | 2007/12/03 | log in or register to post a reply

Anon: I think of that everytime I ...
Anon: I think of that everytime I see a Farm Aid concert. I think WE deserve a concert.

Bailouts are only for those whom the masses deem deserving.

That said, in a cataclysm of foreclosures, I am in favor of some level of government cooling off - not a total bailout, but some moratorium.

Widespread foreclosures in a free market, like a fever, perform their duty but they may kill us in the process.
 
by Diane Cipa | 2007/12/03 | log in or register to post a reply

"Bailouts are only for those whom t...
"Bailouts are only for those whom the masses deem deserving."

Correction, DC -- Bailouts are only for those whom a handful of anointed elites deem deserving.

That's the problem with playing God...how to decide who "lives" and who "dies".
 
by Scott Perry | 2007/12/03 | log in or register to post a reply

It seems to me that this program wi...
It seems to me that this program will do nothing more than help lenders defer some losses. But in terms of actually helping homeowners it's tough to say what impact it will have, if any. 
by Shane Kane - TitleSuccess.com | 2007/12/03 | log in or register to post a reply

It's akin to giving canoes to peopl...
It's akin to giving canoes to people in the middle of a tsumani.  
by Anonymous | 2007/12/03 | log in or register to post a reply

The lenders voluntarily undertaking...
The lenders voluntarily undertaking this measure is probably the best possible solution to trying to make this problem a little less worse for everyone. They obviously need to try to get their investors on board, but I think at this point everyone realizes that they will either have to space their suffering out a little over time or suffer a lot in the near term with little chance of recovering their full investment if everyone goes into foreclosure right away.

I am totally opposed to the government stepping in and dictating what people should do. I am totally opposed to the government using taxpayer money to bailout lenders and investors for making bad decisions. They'll say they're helping homeowners, but any bailout money is really to help the lenders and investors as a reward for making bad decisions about risky investments that they thought would have higher yields.
 
by David Jenkins | 2007/12/04 | log in or register to post a reply

Mark: Nice blog. You are right tha...
Mark: Nice blog. You are right that this is a "delay" tactic, but I'm not so sure that it is delaying the "inevitable." If they can really implement a seven year delay it may be enough to avoid much of the worst that could happen otherwise. If the real estate market turns around in 2009 like many have predicted these subprime borrowers might be in a better situation and the value of their homes might catch up to their mortgage amounts. The could then be in a position to refinance with a prime loan. Surely not all, but hopefully many.

Anonymous: Sorry to hear about you losing your job. That is certainly something that many in this industry are experiencing right now. However, you do have some help from your government - in the form of unemployment. I realize that may be of little consolation at a time like this, but it is something. The many subprime borrowers facing foreclosure need "something" too.

Scott & Diane: I'm not sure why you would call this a bail out. To me, its not quite that dramatic. Nobody is talking about forgiving the debts of the subprime borrowers - the plan will just make it possible for them to repay the debt on better terms to avoid a massive wave of foreclosures.

David: You are right - the best solution is one devised by the lenders and investors to make this problem a "little less worse for everyone." I think that is the aim of this initiative. I'm not sure if they can do it, or if this blanket interest rate freeze is the best way to do it but with the numbers we are talking about, it will be tough to do the loss mitigation on a case by case basis. If the lenders and investors can reach an agreement here, before Congress has to step in, it would be worth a shot.

Thanks to all for the comments.
 
by Robert Franco | 2007/12/04 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

 

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