So the Government is laying out a plan to help the mortgage industry: they will coordinate with lenders and servicers to allow for more loan modifications to happen.
Here is Secretary Paulson:
Paulson has said rate freezes would not be offered to people who can afford the adjusted payment or those who, despite having made mortgage payments so far, have too little income and assets to do so in the future. Another issue was whether to exclude heavy borrowers who owe more than their homes are now worth.
Hope Now alliance members are close to agreeing on a systematic approach for dealing with resets on adjustable-rate mortgages, but they are still developing criteria for determining which borrowers will be eligible for streamlined refinancings and loan modifications
This reminds me of the kinds of market trampling that for which Emerging Markets get penalized every 10 years. Whenever the Government tries to have a direct effect on the market, fuel is added to the fire and ends up being counterproductive. The Government needs to make rules through which the economy plays; if rules are made and then changed, players don't play and the economy doesn't work.
Let's see what they are after here: They want to decide what kinds of loans should be modified in the market, because the market has only been able to modify 1%. Let's see, rational investors and borrowers (knowing that there is a 40% loss event if things go into foreclosure), have only been able to modify 1% of the loans. Is it because they are not cooperating and they need an intermediary or is it that there is simply no opportunity to rationally modify these loans?
I have no idea how they will be able to decide which borrowers are eligible to remain at their current rates and which ones not (without offering the option to everyone), not to say the drastic problems they would create to future incentives. Let's see, the responsible borrower that took out a fixed rate loan, or took out an ARM but has been making significant sacrifices to consumption patterns to afford the future payment, or somebody who refinanced just recently into a fixed rate loan, or somebody who took out the risky loan, but, simply can afford it... those don't get help. But, an irresponsible (or the victim of an irresponsible broker) borrower who took out an adjusting loan that upfront couldn't be repaid at the higher rate or those in the camp above but that are able to that fool the system into believing they can't pay, AND (to do justice to what they are trying to do) can pay at the unadjusted current rate, then, those are getting relief (or in market terms - significant returns on their (conscious or unconscious) gambles).
Market distortion: the government will always be there to the rescue...or investors beware if you are making very risky investments - it could be the case that the government will step in and decide exactly how many cents on the dollar you are getting back.
here is a frustrated borrower:
I’m no doubt opening myself up to charges of heartlessness. I don’t have a an ultralow teaser-rate ARM. My loan isn’t subprime. In fact, I knew exactly what I was doing when I bought an adjustable-rate product. I understood the risks and benefits. I’ll be able to afford the consequences of a rate increase.
Still, why should I be the sap who pays just because the above is true? The Journal’s primer suggests that only borrowers for whom a freeze would make the difference between staying in their home and defaulting would be eligible for a freeze. Those who either can afford their mortgages without a freeze or can’t afford their mortgage under any circumstances wouldn’t qualify. Good luck deciding who doesn’t need the help. I’ve just told you I don’t need it because I’m being honest and I’m not sharing any numbers. Would I like to continue paying the same interest rate for the next five years? Hell yes.
The decision to freeze an interest rate or otherwise modify a mortgage is appropriately handled by the borrowers and the lenders, and, in our current reality, the investors who bought the loans from the lenders. They’re the lenders now. They’ll act in their economic interests, whether that be freezing a rate or forcing a default. Anything else makes a total sham of the system of lending money so a borrower can purchase an asset which, in turn, is pledged as collateral against the loan.
I am simply very skeptical that this effort will succeed without creating huge distorsions in the credit incentives that will simply end up making matters worse.
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