Mortgage Freeze Bla Bla Bla

A lot of people have emailed me and a lot of discussion has been going on in the forums and comments about the new mortgage freeze plan that is being announced today. Even Bill Virgin, one of Seattle Bubble’s favorite local editorialists has a column on the subject today:

You were the careful, responsible sort of home buyer. You took out a plain-vanilla, fixed-rate, 30-year mortgage, shunning exotic loans with low teaser rates, coupled it with a substantial down payment, bought only as much house as you could afford with monthly payments that were within your income. Maybe you’re even paying a little extra each month or have converted to a biweekly schedule to get the loan paid off in advance.

Silly you.

Or perhaps you were the careful, responsible sort of banker, one who got nervous over loans in which borrowers put nothing down, or paid so little that the principal owed grew every month, or signed up for loans whose payments they could never afford once the low teaser rates reset. Maybe you even shied away from making such loans, much less buying paper backed by them.

Silly you, too.

Because you, Ms. Prudent Home Buyer, and you, too, Mr. Cautious Banker, sure missed out on the party. While you were playing the role of the ant, everyone else was enjoying the life of the grasshopper.

And now you, directly or indirectly, will get to help pay to rescue those who had the fun — without getting any break as a reward for your frugalness.

As I have made abundantly clear here in the past, I couldn’t be much more strongly against bailouts. The fallout from the housing/credit bubble is not going to be pretty for anyone, including those of us that did not participate in the irresponsible run-up, but the best way to discourage something similar from happening again in a decade or two is to, as Bill says (but doesn’t necessarily advocate) “let people feel, however painfully, the consequences of their screw-ups.”

That being said, I can’t bring myself to be especially concerned about this latest plan. Many other people in the real estate blogging scene have spent far more time than I can afford to studying the plan, and the general consensus seems to be that it amounts to little more than a publicity stunt, designed to give the appearance that something is “being done” about the “housing crisis.”

Relatively few people will qualify for the freeze, and even fewer will bother taking advantage of it. Why would you lock in your payments on a house in which you have little to no equity, and is now worth 20% less than what you paid? Why would an ARM freeze be more appealing than just walking away? (Actually, according to Deejayoh’s forum post, someone in that situation wouldn’t even qualify, so I guess that just reiterates my point that few will qualify at all.)

Here are some good write-ups on the plan from around the web:

Also be sure to check out the Seattle Bubble Forum discussions:

So is there something wrong with me, that I can’t seem to muster up any rage about this apparently-just-for-show bailout? I’m just not feeling it.

(Bill Virgin, Seattle P-I, 12.05.2007)


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

15 comments:

  1. 1

    THERE’S NO WAY THE AMERICAN BANKS WILL THREATEN A TOTAL CREDIT COLLAPSE BY OPERATING LOANS AT EXTENDED 3.9-4.9% TEASER RATES LOSSES, WHILE SIMULTANEOUSLY GIVING US 5-6% CD AND MONEY MARKET SAVING RATES

    Its that simple. Now 7.5% teaser rates fixed minimum could keep banks barely breathing above water, after they pay for their buildings, computers and staff.

  2. 2
    Kime says:

    If they really freeze these rates we will get to see a real cold freeze in the credit markets, it will make the “credit crisis” of August look like a balmy day.

    They aren’t serious. It’s just a show. Just like when they supposedly “inject” billions of dollars into the system,

  3. 3
    rose-colored-coolaid says:

    Don’t you mean “Mortgage Freeze Rah Rah Rah”?

  4. 4
    Sniglet says:

    Don’t fret Tim. This recent mortgage freeze proposal is really nothing more than PR. Nothing is really changing from what lenders and servicers are already doing. Investors aren’t being forced to lose money, and no struggling home-owner is getting a gift they otherwise wouldn’t have had anyway.

    In effect, the only thing this plan does is help define some industry-wide categories for different classes of borrowers, and make the ways the servicers are working out problems a little more transparent. That’s it.

    Tanta’s write up on Calculated Risk does a brilliant job of digging into the details of this.

    http://calculatedrisk.blogspot.com/2007/12/plan-my-initial-reaction.html

    The thing that is really confusing to me is why the markets are enthused at all with such smoke and mirrors. I don’t even understand why many people are getting all indignant about how some people are benefiting from a “bail-out”.

    THERE IS NO BAIL-OUT!

  5. 5
    [troll] says:

    Thr’s bl-t – slp n yr cr.

  6. 6
    explorer says:

    What they appear to be offering is a floor to the losses for the banks and securities.

    No pain, no gain. I see this as a bailout of the banks.

  7. 7
    Wade Young says:

    We must stop pretending that we have a free market. Meddling in markets using “bailouts” is nothing short of socialism, manipulating the otherwise “free” market. Karl Marx would be proud.

  8. 8
    NotaBull says:

    “No pain, no gain. I see this as a bailout of the banks.”

    I’m by no means in favor of the plan, but I’d like to ask why you would refer to it as a bail out? Who precisely is bailing out the banks?

    All I see is a limited-in-scope plan that provides structure to the losses the investors are to experience, which I’m guessing the gubmint hopes will bring back some confidence to the markets. I don’t think it will work, but that’s another post.

    In essence, I believe that the plan splits the borrowers into two camps:

    1) Those that you can go ahead and foreclose on now, or in the very near future.
    2) Those that you can expect to pay a given rate over the next few years, with a more (not entirely) predictable loss expectation.

    If the gubmint can make it clear enough that this is THE PLAN and there will be no other plan, then the investors/servicers can stop waiting and act on the plan, working to the assumption that they have the implicit backing of the gubmint. “hey, I was just following THE PLAN from Hank, so sue him and not me”.

  9. 9

    I don’t see how this is going to work. I now how people who think they should wait…from the info I can scrap together…their credit scores are too high to qualify. And even if the fit the square peg, I’m not seeing a guarantee that they will have an extended ….er I mean frozen mortgage. Just more stuff to make the Pres look like he’s trying to do something.

  10. 10
    Scotsman says:

    This clearly isn’t going to help a significant number of borrowers. What it will do, however, is allow the banks to transfer certain classes of assets off of their balance sheets, recalculating their reserve requirements, and allowing them to remain solvent for a bit longer. Remember folks, it’s all about the banks, not the little guy. What this does is forstall some bank failures, if only until after the election.

    If you read the specifics on who qualifies, the window is so narrow that almost no one will now, and even fewer will in the future. But the loan then becomes a “workout’ issue, and goes off balance sheet. It’s so simple, so perfectly politically devious….. and in the end totally ineffective.

  11. 11
    Mrs. Jurea says:

    Thanks alot. Your laid back attitude does not help us, the “ants”. Outrage is what I am feeling. Another abuse of power by the feds. Lets reward the stupid and lazy and punish the hardworking.
    We pay our payments, at the 30yr rates. We pee in a cup for work, and file taxes on time.
    But if you are cheap, stupid and lazy, you may recieve all the gov’t. help you want.
    My tax dollars are spent saving others from themselves, while my schools, roads and service personnel suffer.
    What a joy.

  12. 12
    Octavia May says:

    Why is it that no one mentions the Lenders who develop the programs to allow high risk, low score buyers and other crooks to qualify for inflated loans? Lenders are basically responsible for the mortgage mess. They knew that the market was overpriced. They also knew that in order to make the money that they (the lenders) wanted they had to CREATE ways for risky borrowers because truly qualified borrowers in the market had been used up. They (the Lenders) knew that when (not if) the bottom fell out, the government would bail them (the lenders) out and they would be free to start all over again — just as they have before. This “so-called” bailout will only serve the culprit (the lenders).

  13. 13
    Joel says:

    Why would you lock in your payments on a house in which you have little to no equity, and is now worth 20% less than what you paid?

    I keep hearing this argument on the bubble blogs and I have a hard time believing that any recent homeowners feel this way. Think of it this way. If you bought in the last few years, you cleary drank the “housing is superior to renting and renters are trash” kool-aid. What are the chances that such people are going to understand that they are underwater (and will be for quite some time) and that they can rent for much less and yet get much more?

    From personal experience, I have relatives that bought a house a few years ago with an ARM and with zero down (piggyback loan). Their payment was already pretty suffocating, but was about to reset to ridiculous levels in the summer (and their son who was their mortgage broker had to do a short sale on his house because he was way underwater and had to move). The “wisely” refinanced into a fixed loan for a 26% increase in monthly payments. So here are people who understand that home values went down sharply (otherwise why was their son’s home sold for so little), and had very little equity (they had a piggyback loan) and yet they did everything they could to keep their house and mortgage payment. And they consider themselves lucky.

  14. 14
    explorer says:

    NotaBull: “All I see is a limited-in-scope plan that provides structure to the losses the investors are to experience, which I’m guessing the gubmint hopes will bring back some confidence to the markets…”

    That is why I see it as a signal to the banks that they can set a floor to their losses in SOME situations. Freezing the interest rate as exists still brings in cash, vs. total default. Albeit, this is voluntary, but it is a signal nevertheless. Just my impression, FWIW.

    Whether that translates into anything of substance the is more than a finger in the dike, seems unlikely.

  15. 15
    cosmos says:

    Peter Schiff “explains it all” here.

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