FIVE YEAR FREEZE ON SOME ADJUSTABLE RATE LOANS

On a day when the Mortgage Bankers Association reported that home foreclosures hit an all time high, President Bush is scheduled to announce a plan to freeze interest rates for five years for thousands of strapped homeowners whose mortgages were scheduled to rise in the coming months.

The proposal would freeze introductory "teaser" rates on subprime mortgages, preventing them from resetting to higher rates for five years. According to the White House, it would help potentially a little more than a million people who can afford payments with their introductory rates, but not if they jump to higher rates.

The mortgage companies will offer to freeze the loans at the lower introductory rates as long as the borrowers did not miss any payments at the lower rate.

The hope is that the five-year freeze will buy time for the housing industry to work down record levels of unsold homes and for sales and prices to start rising again.

A housing rebound would allow homeowners to refinance their current adjustable rate mortgages into fixed-rate loans with more affordable monthly payments.

The big sticking point in the lengthy negotiations was getting investors who have purchased the mortgages after they have been bundled into mortgage-backed securities to agree to accept lower interest payments. Critics have said even with a deal, there are likely to be lawsuits.

Under the administration plan, the rate freeze will apply to loans made at the start of 2005 through July 30 of this year and will cover loans that had been scheduled to rise to higher rates between Jan. 1, 2008, and July 31, 2010. The plan is designed to help those with two-year or three-year low teaser rates on their mortgages.

"The $64,000 question remains: will investors who might balk at going along with this be able to maintain legal roadblocks and prevent the plan from going into effect?" said Sen. Charles Schumer, D-N.Y

MORE OBSERVATIONS:

From the Seattle Times, 12/6/2007

"Freezing interest rates on adjustable mortgages is not going to help most homeowners in trouble. Well over half the delinquent subprime borrowers are still paying the low come-on rates. In other words, they can't even afford the mortgage at their current below-market rate." -- Froma Harrop / Syndicated columnist

From the Chicago Tribune, 12/6/07

"With more than an estimated $1 trillion worth of subprime loans outstanding, the U.S. housing industry is facing a crush of defaults in 2008. The Center for Responsible Lending estimates that 1 in 5 subprime mortgages made in 2005 and 2006 will end in foreclosure."

"It would only affect borrowers living in their homes, not those who purchased housing for investment purposes. According to the source briefed on the plan, those who have a 3 percent equity stake or more in their property also would not be eligible for the freeze."

From the Wall Street Journal, 12/6/07

"The U.S. economic and legal systems are built on the sanctity of contract, and even the hint that government is compelling investors who now own these mortgages (the banks having sold them as bundled securities) to take less money puts the U.S. on a very dangerous road. At a minimum, it will raise the future risk premium that investors will demand for investing in U.S. real estate, which means it will be costlier to get a mortgage in the future."

"Moreover, the evidence suggests that even when troubled borrowers receive a generous reset on their mortgage payments, as many of 40% of those borrowers still eventually default. The refinancing plan might only delay the day of reckoning and lead to bigger losses in a falling market. An analysis by the financial services consulting firm Graham Fisher calls this "the rolling loan gathers no loss" philosophy, and notes its similarity to the strategy that prolonged the "S&L crisis and the Japanese banking crisis."

"A Public Opinion Strategy polls find that 62% of Americans oppose a mortgage bailout. More than 95% of homeowners are making their payments on time, and they believe it is unfair to pay more in taxes to assist those who've been less responsible. They're right."

From REUTERS, 12/6/07

The Mortgage Bankers Association said foreclosures reached a record high in the third quarter, with 1.69 percent of loans outstanding in the foreclosure process. Late payments on mortgages hit the highest level since 1986.