FDIC pushes ARM rate freeze

We find this item from CNN Money both interesting and a bit confusing, so we'll be asking your help later, but here goes: "The country's chief bank regulator publicly proposed that mortgage lenders and servicers permanently freeze interest rates on sub-prime adjustable-rate mortgages (ARMs) for many homeowners."

More: For owner-occupied homes where the loan is current, "'Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it,'' Federal Deposit Insurance Corp. Chairwoman Sheila Bair said in prepared remarks at an investors' conference."

More from Bair's speech (read the whole thing here): "And let's be honest about it. Hybrid ARMs were never made based on the assumption that the borrowers would be able to make the payment once the loan reset. They were designed as two or three year "bullets" ... with the assumption that home appreciation would allow the borrower to refinance at, or before, reset. Given current conditions in the housing market, this business model is no longer viable, which should come as no shock to anyone."

We have so many questions we'll just lay them out:

• Are lenders and servicers likely to seriously consider an appeal like this?
• When a suggestion like this comes from a regulator, is it an implied threat?
• Do servicers have the discretion to modify large numbers of loans? Bair said she believed they did. Do they?
• Is it fair? Why freeze rates on only sub-prime ARMs? Why not all ARMs? And what about relief for 30-year fixed borrowers who have higher rates than these frozen rates?

We look forward to your thoughts on this.
Hat Tip: MyLessThanPrimeBeef

Comments

[adoptive father]

What a bunch of crap. I have three young children that will probably not have a chance to afford a home in our area unless prices come down substancially some day. How prices went so high is a total mystery unless you understand reckless lending practices. And now I hear my government wants to keep prices permanently unaffordable by changing the game after the deals are made? Where do I get in line for phony deals that hand me free money??

[nerd]

Have any of US in US commuted sin by not buying house at prices these folks bought. Now where were these people when stoks crashed. May be they should talk to credit cards companies to keep low introductory rate of 1-2% for all of US. I will say shameless approach of these leaders who fail to grasp the basic wrong facts with housing. 80,000 average income household cannot afford 500,000 home .Period , even at basic interest of 6%. So increasing loan limits and setting same rates even will not bail lot of people. reason their income donot support the current level of home prices with . So please think before you talk, a sincere advice.

[Roger Moore]

It's obviously a ridiculous suggestion. Lots of those loans were made with teaser rates that were lower than Prime, and in some cases lower than inflation. There's no way that lenders could convert those loans to fixed at the same interest rate. It's either grandstanding or a decision made by somebody who has lost touch with reality.

[brettdl]

I'll take a stab:

Are lenders and servicers likely to seriously consider an appeal like this?

I don't think they can. To lock in a mortgage at 2-3 percent for the next 40 years would mean losing money after inflation. As Bair says, less than 1 percent of mortgages have been restructured. By the time they get moving on this, it will be too late.

When a suggestion like this comes from a regulator, is it an implied threat?

From where I'm sitting, it sounds more like D-E-S-P-E-R-A-T-I-O-N.

Do servicers have the discretion to modify large numbers of loans? Bair said she believes they do. Do they?

That depends on who holds the debt. I think Bair is being somewhat unrealistic.

Is it fair?
Well, from the perspective of a renter, it's not fair. It keeps prices from crashing as fast as they should. From the perspective of the overall economy, it might slow down the crash.

In the end, though, I don't think enough servicers will be able to make much of a difference.

Why freeze rates on only subprime ARMs? Why not all ARMs?

That would be tantamount to admitting the problem is more than subprime. They're too scared to do that.

And what about relief for 30-year fixed borrowers who have higher rates than these frozen rates?

Buh hahahahahahahahahaha! (Evil cackle)

BTW, did you notice Bair only thinks there are $300 billion worth of resets in the pipeline? That's a lot lower than the numbers discussed on this blog.

[Robert S. Hoover]

'You're doing a heck of a job there, Shelia.'

[barnibus]

if my lender freezes these arms at the introductory rate, and does not provide me witha comparable rate, I will be the first to sing on to a class action lawsuit

[Steve]

it is more cost effective for banks/lenders then massive foreclosures on then market, which would cost more then locking in ARMs

[Bill Jones]

If the rates on all "ARM" loans are frozen I would think that the value of the securities into which those loans have been placed would decline. This is because when they were sold part of their value had to do with their increased yield over time.

If the value of the underlying securities declines, their owners will suffer losses. Couldn't the owners (banks, pension funds, mutual funds, investment banks, etc.) sue the government, on the grounds that government action caused them a material loss? I wonder about this.

[Michael Snyder]

Let's call it like it really is: "Hybrid ARMs" are an instrument for maximizing a lender's profit with little care given to the bower's long term financial health. Re-financing brings an opportunity to impose a plethora of fees and the prepayment penalties written into many of these loans leave "stressed bowers" few options. Now, as long as prices were increasing at an expediential rate; everybody was fat, dumb & happy. I'll bet if someone actually crunched the numbers; you'd find the lenders did as well as many of the "flippers". Having to teach ethics in school is a sad reflection on our society as a whole, and it seems a lot of MBAs skipped class. We all know government "solutions" seldom work as planned. What would work is a fundamental shift in the business models of many lenders into one where the long term financial health of the client becomes a priority. Maybe I'm shooting a little high...

[Michael Stipes]

I don't understand why the government wants to keep prices up. Its as if it is trying to punish those of us who weren't stupid enough to buy an overly priced home by taking on a mortgage we would never be able to afford in the long run. The FDIC shouldn't threaten a bailout for all the people who were too stupid thinking that Real Estate prices would go up for perpetuity and that interest rates wouldn't rise. I think they should focus their regulatory zeal on insuring that the same kinds of activities the mortgage companies were doing can't happen again instead of bailing everyone out.

[John Reece]

A lot of the gloating renters out there ought to consider that if housing prices crash as much as they're hoping for it will result in a recession so deep they might not have a job or portfolio income to 1) pay their rent or 2) buy a house at their deflated target price.

[Dave P]

This is so insane. Peter, you forgot to ask this question: What about people that showed financial responsibilty and did NOT buy homes that they couldn't afford? Are these people never supposed to own a home?

The sob stories where someone claims they had no idea that a $600,000 home should have a mortgage higher $2000 per month are swaying our regulators. And the regulators are responding by absolving all Americans of the concept of personal responsiblity.

The crash needs to happen so that prices come down to where they should be. The government didn't get involved on the way up, so don't interfere on the way down. I'm not one of the bubble crybabies. I enjoy a good bubble run up. But I also realize that it was never supposed to last forever and the hangover when it's over is part of the dance.

The other thing that the politicians don't seem to realize is that these people are better off losing their homes. They're not going to jail or being exported; they're just going to have to rent. Not only is that not the worst thing in the world, it's what they were supposed to do anyway. Locking the rates just traps them into a home they probably can't afford at even the teaser rate.

Think about it this way. These people will still own these homes for a lot more than anyone will pay for them. If they need to move in the next 10-15 years they will still be upside down. And their only option will be to foreclose or come up with the cash to cover the inequity. But they won't be able to save because their mortgage, even at the locked teaser rate, soaks up 40-60% of their take home pay. Wouldn't they be better off taking the hit now and going into a rental where they can put money in the bank?

This idea will actually help the lenders more than the homeowners. The lenders won't have to foreclose and lose a huge sum at auction. Instead they will have someone maintain the property and service the loan for years. Just long enough for the market around. 5 or 10 years from now when the market climate has changed for the better, the lenders will shotgun these rates up to where they were supposed to be, the people still won't be able to pay, and the lender will be able to auction the property profitably.

[Sean B]

I believe that they could (via legislation) change the laws for mortgages going forward, but that existing contracts can't be modified.

I wish the government (including the Federal Reserve) would take a "hands-off" approach and let the chips fall where they may.

[amir]

Banks and mortgage companies sell money, just like your grocery store sells fruit, that's their product. The price they charge is set in the interest rate and in some fees.

The government can't go to the banks and ask them to cut their price by 70%, just like it can't go to your grocer and tell them to cut the price of apples. Especially when only some customers will enjoy it and others won't. The ability to set prices is one of the basic tents of free market capitalism.

So why would suggest such a... well... dumb idea?

Because there is no other solution, and as politicians they want to show they care.

[are they crazy]

What kind of real research is going on prior to these proposals? How many of the so-called sob stories are really serial refiers, flippers, investors? Are we going to bail out people that lied on applications that it was their primary residence? Are we going to bail out people that already took hundreds of thousands in equity out of their properties? Does anyone even know what proportion of ARMS and subprime ARMS are really victims? And victims of what - ignorance? "I didn't know I had an ARM loan, I didn't know what my application said, I didn't know you hade to pay back an equity or HELOC, I didn't know that housing prices could stop going up, I didn't know that loan criteria could change, etc., etc., etc." And all these transactions were VOLUNTARY - no one forced anyone to buy a home or refi. Please tell me someone - who deserves a bailout and what percentage of the current whiners is really a victim?

[I Give Up]

I give up.

I can barely afford to rent here, never mind own. My savings are *worthless* because of the devaulation of the dollar. Not carrying credit card debt makes me look like a loser in the eyes of the Credit Bureaus. I mean, the government *taxes* savings - you lose more than you gain.

It doesn't matter if there is a bailout, or if the economy collapses - either way people like me get screwed for being responsible - all because we've somehow become a country where 70% or so of our GDP is due to buying stuff we don't need.

Nothing makes sense, and I've given up trying to figure it out. All I know is that I don't want to be here 20 years from now. Eventually people are going to figure out we're broke.

All this "We Think The Worst Is Over" talk is just smoke to try and puff up the economy in the hopes that time will fix what the Fed cannot.

[Dr. JwB]

John Reese and others threatening a recession if housing returns to a level commensurate with income: If that is true, then it was just a false economy to begin with, and unlikely to be sustainable in the long run. So take your medicine now, or take it later, but don't insist that the false economy go on forever. If a recession is inevitable, I'd rather get it over with while I'm relatively young.

[G Spot1]

Um, so we are going to take the most irresponsible borrowers with the worst credit histories, who bought homes they couldn't afford, and reward their stupidity by locking them into a sweetheart, below market interest rate because we don't want them to have to move and, God forbid, rent?

This is insanity. I guess the only thing more American than the free-market is cheap credit and 3000 square feet on 1/8 acre.

[Katy]

Most of the commentators on this blog post are more intelligent that anyone in the US government.

[manraygun]

Behold the power and splendor of John Reece! Yes John, I now grasp the glory and wisdom of your words! Your powerful and sage vision of a dire future corrects the error of my faulty thinking. Idiotic failed flips must be maintained for the good of the economy. As a society, we must preserve moronic investments of the type you've no doubt made to avoid a recession! I myself, a renter, must sacrifice my family's financial future for the good of you and your noble ilk! Yes, I will pay 700k for that three bedroom POS in north hollywood so that bad investment of all stripes may grow and prosper! LA I command thee! Bow down before the soaring logic and rhetoric of John Reece and sacrifice your best interests at the altar of his all knowing macro-economic majesty!

[Kiet Mai]

The chairman of FDIC wants the ARM frozen for those greedy people? Please, can someone tell me how idiotic it is for the chairman to suggest such a thing.

[Ace]

I may be wrong but I don't think this includes teaser rates (rates of 2 or 4 percent). I think they are talking about keeping rates fixed for subprime ARMs. That would be keeping a rate at the current rate of 9 percent instead of resetting to 15 percent or higher.

There are alot of subprime people right now that need to refinance and cannot. No one is going to give a loan to someone with a 620 fico score for less than 20 percent. Their houses are upsided down and no lender wants to take on unsecured debt. People who did subprime loans will lose their houses because they were not prepared to buy a house in the first place. There is nothing the Feds can do about it. They can't make banks lend them money. We live in a free market.

My guess is that we will continue to see a higher down payment requirement and the return of PMI. Anyone remember PMI? That was insurance for people who have less than 20 percent equity. PMI was replaced by a second mortgage (aka, unsecured debt). What a mistake.

I also think that we will see longer loans and people will start taking out 40 or 50 year mortgages to buy a house. Americans love monthly payments and don't plan for the future anyway. These will be very popular.

When that runs out, we will have to change to 3 income households. When single family households could not afford life, we went to dual income households. Better get a second spouse or put your kids to work! Owning a house is the American dream!

[l.a. guy]

"And let's be honest about it. Hybrid ARMs were never made based on the assumption that the borrowers would be able to make the payment once the loan reset. They were designed as two or three year "bullets" ..."

I find that surprisingly cynical for a public official. If they thought these types of loans were never made with the assumption the borrower could pay them then why didn't the FDIC shut them down a long time ago? By her logic the only way the loans were sustainable was if prices went up forever and borrowers could keep refinancing.

[Cal]

Think about it from the servicers POV, if they made such unilateral moves the bondholders would never ever use them again as a servicer. It doesnt matter that some of them have unprecedented ability to modify mortgages (due to very liberal servicing agreement) if the bondholders sees the servicers are "pro" mortgagor instead of looking after their best interest it will be the end of any future business and most likely a lawsuit in order to pull the existing business.

I also think the reason you see such few modifications currently is because when it gets down to modifications and hardship the servicers go through and document income to see if the client can actually afford the home. I am guessing they cant. The Fed (seperate from bairs speech) also warned servicers on modifications leaving excessive DTI, so if the servicer cant mod an unaffordable loan due to DTI restrictions (i.e. they could never afford the home to begin with) the only choice left is really foreclosure.

In the case of a serial refinancer after the second refi they are pretty much in a hole that can only be filled by more refinances or an incredible wage increase. Now that mortgage money has dried up they cant tap the till anymore and are doomed to their fate.

[Bill B]

Honestly, is an FDIC chairperson required to know economics or even basic math to get their job? Unbelievable.

So lets assume investors are forced to keep rates at teaser rate levels of 4% instead of 9% that they were promised by lending to subprimers. The holders of these mortgage backed securities are holding onto bonds that are valued assuming a 9% return on the life of the loan.

You know what the present value of a 4% bond versus a 9% bond is over the life of a 30 year mortgage. It is almost exactly 1/4th the value or for those of you as equally math compromised as Shelia, 25%. That means the value of these bonds would immediately be "marked to market" at 25 cents on the dollar.

So that would leave banks, retirement plans and other investors with an immediate $900 billion loss on $1.2 trillion in subprime loans. Can't imagine that would cause a problem Shelia.

So Shelia, you monkey, if you really want to cause the next Great Depression immediately, lets go with your idea. It just might do the trick.

Now for those of you more mathematically inclined than Shelia, II know it's less than a 30 year PV calculation because 2-3 years go by before the loan resets. On the other hand, add in the interest on the levered loans and the fees charged by Wall Street to package the loans, and it might even be worth less than 25%.

Can you say bank failures?

Oh wait, maybe this is her stab at creating job security?

Shelia you smart biatch!!!

[Willie]

"Americans love monthly payments" The statement holds true for any country for that matter. The U.S. is not any better than any other third world country in which people buy snickers on installments since their meager earnings would not cover the price tag of even an inexpensive pair.

The same is happening here, wages are not keeping up for inflation, hence the need for credit to purchase even basic necessities. Do you actually think that someone earning minimum wage can coceivably afford a home anywhere in the U.S.A.? Do you thing that someone earning minimum wage can support a family or pay rent on a somewhat decent (not oppulent) place to live instead of a POS hell hole anywhere in the country? By the way, even those POS hell holes are becoming expensive due to gentrification. I remembe on trip I took to MX someone offered me to buy a garden hose on payments!

I don't believe that the government or anyone for that matter should offer fixed ARMs at the original teaser rates since it would not be fair to those of us that are paying somewhat higher interest rates for being responsible borrowers. I do believe that any kind of reprieve should be at current market rates and based on the credit worthiness of the individuals seeking the relief , or extend their monthly mortgage payments from here to eternity. Investors, flippers and idiots should not apply.

[Roger Herrick]

It’s estimated that in the next 12-18 months, over 2 million people will be faced with their Adjustable Rate Mortgages resetting, resulting in an increase in their minimum payments of anywhere from 30-100%. While this one action will not push people over the top, what it does do is add additional strain to an already over-leveraged consumer. Add in any life events – such as injury, loss of job, or increasing payments due to rising interest rates in the consumer arena – and you have a recipe for financial disaster.

Now is not the time to go it alone. And it’s not the time to obtain quotes from five lenders. Partnerships are critical to your success. Unfortunately, too many people became comfortable with the idea that everyone could get a loan and it wasn’t important who a buyer got their loan from. Not today. You need one “go to lender” who not only has product, but who’s also an expert in underwriting and credit analysis, has a great credit repair experience, and is local and accountable. A loan officer from Quicken Loans, or an out-of-the-area lender, doesn’t stand to lose much reputation-wise if your deal goes south. I do.

www.contactherrick.com

[MattJ]

I think it is useful when proposals like this are made to assume the person making it is not an idiot, and go from there. If it still doesn't make sense, then you can fall back to believing she's an idiot.

First of all, as I read the proposal she is talking about a small number of people; only those in subprime mortgages who have never been late on a payment before the reset. She is also suggesting that the servicers do this because doing so would be better for the lenders, not because it is better for the homeowners. Why would this be?

The homeowners who would benefit from this have shown that they are capable of making these payments. If they do not get this option, they will almost certainly lose their home and be foreclosed on. It is very likely that there will be many, many others foreclosed on even with this proposal. After foreclosure, lenders are likely in this environment to recover significantly less than the amount lended; probably less than the value of the mortgage being payed at the current rate before the reset.

I think Ace is right, this is not aimed at teaser rates well below prime, this is aimed at the 8 or 9% rate that is about to adjust up drastically. If this were to happen, I do not think it would have much impact on the coming house price crash; there is already enough excess housing and reduced availability of mortgages that prices in the bubble areas are going to plummet. Since these mortgages won't be transferable, it won't even prop up the value of the homes owned by those getting this benefit. This is about reducing the number of foreclosures and providing at least some cash flow to the lenders.

This story scared me more about the future than anything else that has happened in the last few months. If the FDIC chair is proposing this, I fear she sees a lot of weakness in the banking sector, probably more than FDIC can handle. Those of you criticising this as a bailout, are you really that confident that we aren't facing a future of many large bank failures, that will overwhelm the FDIC reserves? I'm not. If proposals like this might help us relive the 70s instead of the 30s, I am certainly open to it.

[Cal]

Todays nationalmortgagenews.com:

"Coalition: Private-Label MBS Servicers Fear Suits

Servicers of private-label mortgage-backed securities are concerned that some investors are preparing to sue them for approving loan modifications, according to the Consumer Mortgage Coalition. "

Servicers better have the investors best interest in mind when servicing the loan not the consumers.

[MyLessThanPrimeBeef]

I think Ace is right, this is not aimed at teaser rates well below prime, this is aimed at the 8 or 9% rate that is about to adjust up drastically. If this were to happen, I do not think it would have much impact on the coming house price crash; there is already enough excess housing and reduced availability of mortgages that prices in the bubble areas are going to plummet. Since these mortgages won't be transferable, it won't even prop up the value of the homes owned by those getting this benefit. This is about reducing the number of foreclosures and providing at least some cash flow to the lenders.

This story scared me more about the future than anything else that has happened in the last few months. If the FDIC chair is proposing this, I fear she sees a lot of weakness in the banking sector, probably more than FDIC can handle. Those of you criticising this as a bailout, are you really that confident that we aren't facing a future of many large bank failures, that will overwhelm the FDIC reserves? I'm not. If proposals like this might help us relive the 70s instead of the 30s, I am certainly open to it.

---------------------

First, Matt, you say this wiould not impact much the coming house price crash.

Then you say those against this freeze, criticising it as e bailout, fail to realize the risk of another derpression.

How can something of not much impact be so significant????

By the way, the FDIC didnt' see this one coming, or perhaps they chose not to see it. So, what makes you think we should believe them now? Do they have any credibility left?

In fact, does anyone in the persent administration, including the Federal Rreserve, have any credibility left? Does Greenspan have any credibility left?

How can we have faith in the same guys who created, ignored and/or enabled the problem to resolve that same problem?

[anne]

Look, wake up there is going to have to be a freeze on ARM's or this economy is going into depression. Why cant you just come to grips with the harsh reality that the lenders were morally negligent in issuing ARM's, no doc loans, etc. These investment vehicles should never have been allowed. Also I myslef who am a very conservative person took out a 7 year arm without fully understanding its implications. I do have 20% down on my property and if push came to shove I would be able to salvage it. But I blame this mess on the lenders not the people who took out these irresponsible ARMS at teaser rates. Lets all ban together as a nation and do the right thing and freeze these things to save our economy. Stop whining about those who may be benifted.

Please use your heads

Anne

[Anne]

just another thought. The idea of freezing these ARM's and allowing people to keep their homes is also going to enable the banks to clear them and enable them to evaluate and price them correctly so that is unfreezes the credit market and allows buyers to put a value on these vehicles. They may only get 25% on the dollar but it unfreezes the now frozen credit markets and allows the marketplace to function again. It allows the banks to put a real number on there losses and realistically rate these morgages. We are all going to have to work together if we are going to solve this thing. Clearly the fact that Secretary Treasurer Paulson has proposed Hope Now
Alliance is a clear signal that that banks were unable to solve this problem and needed a govt solution.l
People stop bitching about someone who got into a bad Arm ignorantley will get help. Do you remember when you were getting flyers in the mail every day from these banks offering these types of teaser loans. Most people sadly are ignorant of the consequences of this kind of fraud. Lets have more compassion and stop worrying about what you didnt get out of it.

Anne

Anne

[Horizontal Translation]

Read the Nov. 28 post (and numberous others as well) here:

http://real-estate-and-urban.blogspot.com/