Subprime Mortgage freeze. Good or Bad?

[C6 Vette]

The Bush Administration,treasury Dept., and the private banking sector have agreed to freeze teaser rates on ARM's for five years that were initiated between Jan. 2005 through July,2007...To qualify, you cannot have any delinquent payments on the mortgage teaser introductory period, must live in the property, and prove that you could not afford the mortgage when it resets to the higher rate...

IMO, it seems the U.S. govt. is rewarding irresponsible ppl that bought more than they could afford.....To me, this does'nt fix the problem, it only prolongs it. Sooner or later they will need to start paying down principle.....In five years from now when this "bailout time" has expired, is there any definate proof that interest rates will be the same as they are now? Will the housing market see a steep incline in value in five years? These two things would have to happen in order to make this plan work...

With values still inflated above what they should be, I just can't see how many ppl will be able to drop 20% down on a $500K house and be able to pay on a $400K 30 year fixed rate mortgage...Because after the ARM debacle, the traditional 30 year fixed will be the only loan type to get...Which requires a prime credit score and PROOF of income, which in the last few years have been thrown out the window by many underwriting departments..

 

[STAMPEDE3]

IMO, it seems the U.S. govt. is rewarding irresponsible ppl that bought more than they could afford.......

I'm with you on this one.

 

[Evil Bender]

I'm with you too. Seems to me like I should have got in over my head, instead of buying what I could afford .What a crock of **it ! This will come back to bite all responible buyers with higher longterm rates and inflated house values for decades to come.

 

[shanezt]

i see it as good, these lenders need to lower all interest rates across the board. the freeze is only a band aid, i laugh every time i hear of an other lender closing doors. they get what they deserve, in stead of forclosing on people they should lower the payment just to keep them in the house. otherwise the banks end up taking back a house that needs thousands of $ in work and is only worth 70% of what the loan is. then they loose tens of thousands of dolars. just seems like they would loose less if they just dropped the interest.

 

[FL-Orange]

IMO, it seems the U.S. govt. is rewarding irresponsible ppl that bought more than they could afford.....

+2 and of course it's bailing out lenders who were more than happy to grant loans to people who shouldn't have qualified for them.

All this and he couldn't pass the expanded child health bill. :dw:

IMHO, Bush is a tool more interested in bailing out big business than actually helping people who may actually need it.

 

[dtheo]

You forgot to mention that this is VOLUNTARY by the banks and is not literally freezed at the lower rate. While I don't think the idiots who can't afford their houses should be bailed out by anyone for any reason, I do think a voluntary freeze rate that banks want to participate can't hurt. It will save some banks millions of dollars on litigation fees and fees associated with foreclosing a house. Then again, if I was one of those people who needed the help, I would be for this 100%, we all know that many of us live paycheck to paycheck and if you were to get fired by your employer and it takes 6 months to find a job, losing your home is very possible.

.02

 

[Adam.L.]

...rewarding irresponsible ppl that bought more than they could afford...

Yup, It's quickly becoming the American way.

I couldn't decide if this is a good or bad thing - it all depends on how it affects the real estate market.

 

[Njc0las]

They need a place to get their food stamps and garage their Escalade.

 

[SVT4ME]

And you now hurt the people who knew they couldn't afford the house and didn't buy. They made the right decision and now get no benifit.

 

[Klay]

Well while I agree it may reward people acting irresponsibly, if there are enough of these people that are going to go into forclosure than it can really bad for the economy. I would rather save our economy than attempt to make irresponsible people learn a lesson. Plus, after the 5 years if they don't get their act together they will probably go into forclosure anyways but at least we will have all these forclosures spread out and not all at once.

 

[ImShakn]

And you now hurt the people who knew they couldn't afford the house and didn't buy. They made the right decision and now get no benifit.

How? This is not affecting new loans, only existing loans. It has been very difficult to get a sub-prime loan for months so I don't see how it even affects people who have waited...unless you are looking to buy foreclosures.

IMO, it is worthless legislation. the only thing that it is doing is postponing the inevitable. Lenders are already working with people to avoid foreclosure, but the problem is that many people bought their house with the assumption that they would be able to refinance before the rate increased. They did not consider that the value of their house would go down and they would be stuck with a mortgage that they can't afford on a house that they have negative equity in.

These same people will still face the same problems in five years. They will still have negative equity and still won't be able to make the new payment. They also won't be able to sell because they owe more than it is worth.

 

[werstlna]

How? This is not affecting new loans, only existing loans. QUOTE]


In the immediate short term this does not affect new loans. However, all future loans will have higher interest rates if this legislation is broad enough. Here's why.

When someone gets a mortgage it is very quickly sold in the secondary market. Banks get their capital from the secondary market to continue to have cash to lend out for new loans. Mortgages are bundled together in tranches and sold as packages to investors. Typically like-risk mortgages are grouped together to form a specific risk characteristic in each tranche. Investors then can choose their level of risk aversion and select the tranche with its corresponding risk/reward characteristics. If rates are frozen and not allowed to adjust upward, the return on investment investors receive in the secondary market is frozen also. But guess what, their risk position is not reduced (perhaps only marginally reduced if this legislation actually reduces foreclosures). Remember that in order to entice investment you must offer an expected return. The higher the risk (i.e. sub prime mortgages) the higher the expected reward.

So now you've got investors receiving lower returns than they were promised, in writing via mortgage contracts. In the future investors will demand a higher rate to cover this newly added risk of governmental interference. Before investors might be willing to accept tranches with an initial ARM rate of 5% which resets to 7.5% after 3-5 years. After getting burned by the gov't and having to receive the same 5% for an additional 5 years they won't make that same investment decision again. The rates are going to have to look something like 6-7% initially with a higher reset of 9+% or much fewer ARM's available and just strictly fixed rate mortgages at 7.5+%. Guess what that means - the only money available to lend on mortgages will be higher interest rates for ALL OF US.

And for those who think it's about time these "investors" get what they deserve, please consider that anyone with a mutual fund or 401k is likely to be one of those investors. This is yet another example of how the gov't interfering with the free market will have unintended consequences that will be worse than the problem they are trying to solve.

 

[ImShakn]

You explained how it has already affected the sub-prime market, please explain how that applies to conventional mortgages. The current rate for conventional mortgages and the ease of obtaining one suggests that there has been no impact. Since August, I refinanced one house and bought another. Both are conventional mortgages with rates at 6 1/8.

I understand the effect of investments, however investors (fund managers) will take their money somewhere else which only drys up the funds for sub-prime mortgages...which are "da debil."

 

[Common]

Wrong for some many reasons I don't even have the time to type out right now.

 

[ON D BIT]

+2 and of course it's bailing out lenders who were more than happy to grant loans to people who shouldn't have qualified for them.

All this and he couldn't pass the expanded child health bill. :dw:

IMHO, Bush is a tool more interested in bailing out big business than actually helping people who may actually need it.

what about the expanded child health bill? you believe the goverment should pay every childs health bill? isnt that what parents are for?


when a lender forcloses on a piece of real estate does it actually hurt them? they get the house, and sell the house. if the house is sold below the value of the loan the lender still can go after the difference from the mortgage holder correct? the lenders dont lose a thing from forecloser, its just a little hassle for them.


the bigger problem is the media, get rich quick gurus, and communities all over the nation stating why rent when you can buy with the same payment? then you have the mortgage agents stating they need to be in an adjustable loan to keep more of your income. then you have people who have no means buying a house being stuck in a mortgage payment because a stupid loan officer stated they could afford a variable mortgage at half thier income. then people start to believe they have equity in thier homes and start to buy more stuff they cant afford like, landscape design, furniture, cars, paying of thier credit cards.


and when home values plumitt they scream its not fair!!!!! like they are little kids! can the goverment help me?

 

[werstlna]

You explained how it has already affected the sub-prime market, please explain how that applies to conventional mortgages. The current rate for conventional mortgages and the ease of obtaining one suggests that there has been no impact. Since August, I refinanced one house and bought another. Both are conventional mortgages with rates at 6 1/8.

I understand the effect of investments, however investors (fund managers) will take their money somewhere else which only drys up the funds for sub-prime mortgages...which are "da debil."

You've got a good point, I'm not sure how exactly this will affect traditional loans. In general lending standards are tightening and the no-doc and low-doc loans are evaporating. As a whole, when it becomes more difficult to access capital for loans (via the secondary market) rates trend upward. There is a spill over affect from sub prime loans to better quality loans, even though traditional loans are safer there is a perceived increased risk by borrowers which in turn demands more return (higher rates) for their investment. Further, if home prices decline the collateral used to secure these loans is at risk of not being able to pay off the note in the case of default.

On the other hand, moves by the Federal Reserve will likely continue to help as they lower rates. There are a lot of variables.

 

[spinz4]

really stupid and unfair. People knew what they were getting into and now the Govt. is going to bail them out? Not smart. People will never learn from their mistakes this way. Also, it's very unfair for the lenders.

 

[Jefe]

Just our govenment helping out all the idiots who didnt know what they were getting into

 

[dtheo]

Just our govenment helping out all the idiots who didnt know what they were getting into

You do make a point, but this is VOLUNTARY by the banks, they don't have to participate in this deal so why is everyone getting bent out of shape. Its partial the banks fault for lending money to EVERYONE. The banks new the risk of this and now the banks should pay for it. You and I, the ones who do have good credit, should not have any burden on this, our credit requirements should remain the same.

.02

 

[mc01svt]

Just our govenment helping out all the idiots who didnt know what they were getting into

I wouldn't say their all idiots. The home buying process is not something alot of people are experienced in or even understand. Not everyone is an expert in real estate. Should someone hire an attourney just to go over all the legal jargon? :shrug: I think fault lies more with the lenders decieving people into thinking they can afford a house without explaining all the risk. I know its just business but that doesn't make it right.