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.

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.

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.

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”.

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

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!

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

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.