Schwarzenegger, Countrywide in mortgage deal

A day late, my apologies, but worth noting: "Four major sub-prime lenders promised to give a break to California homeowners who cannot afford escalating mortgage payments, under a plan announced Tuesday by the lenders and Gov. Arnold Schwarzenegger."

More, from SFGate.com: "Countrywide, GMAC, Litton and HomeEq - which collectively service more than one quarter of sub-prime loans to people with poor credit - agreed to maintain the initial, lower interest rate for some sub-prime borrowers whose rates are scheduled to jump significantly higher. To qualify, borrowers must occupy their homes, have made their payments on time and prove they cannot afford payments with the higher interest rate."

It's not clear how long the lenders will freeze rates under the plan, which Schwarzenegger says will save "tens of thousands of people from being added to the foreclosure lists."

Where did the idea come from? According to the governor's press office, "The agreement the Governor negotiated with lenders builds off a proposal put forward by Federal Deposit Insurance Corporation Chair Sheila Bair that encourages lending agencies to keep sub-prime mortgage borrowers at their initial interest rate if they are living in their home, making timely payments, but can't afford the loan "reset"--or jump to a higher rate."

Your thoughts? Comments? Email story tips to lalandblog@yahoo.com.
Photo Credit: AP
Hat tip: E&A, via email.

Comments

[INland Empire]

It will be interesting to see how long this grace period lasts. I also wonder if the buyers will hold up their end of the agreement or in a few months we will see some other "negative real estate news" about them hovering in default again.

[jaded]

"To qualify, borrowers must ... prove they cannot afford payments with the higher interest rate."

Duh, if they can prove that can't make payments with the higher rate, then they shouldn't have gotten the loan in the first place!!!

So now the RE free market has to be tampered with to accommodate these morons who couldn't see past the teaser rates. Brilliant, just typically tax-the-responsible brilliant.

[yourkillingmelarry]

If you are a hard working, fiscally responsible saver that currently resides in California and are waiting out the housing debacle, take the time now to prepare yourself for getting slapped in the face, knee'd in the gut, and kicked in the groin. Because that is what your local, state, and federal government are getting ready to do to you. Of course don't get too upset over this, we are past a point of no return in this housing slump so these initiatives will be limited in effect, but they are just enough to get under your skin and change the way you normally vote.

[jb]

This will serve to prop up home values artificially. It is directly punishing those who have been saving for a home and realized that taking a risky mortgage meant risking losing your home.

Arnold - I will happily support your measure when you will support me in obtaining a home I cannot afford.

[Aaron Kramer]

The truth is this plan will allow the lenders to keep no-performing loans off their books while simultaneously keeping keeping unwanted homes in hands of unqualified buyers. Homeowners who can't afford their lifestyle will become slaves to their homes because they are upside down on their loan. Instead of being foreclosed on they will be stuck in a lifetime of debt as home prices fall. Well at least the state and municipalities will be able to collect their tax revenue without any interruption. I'm sure if they can't they won't put a lien on these poor people. LOL. Wouldn't it be better to let foreclosures occur and penalize the lenders for their part stupidity?(The borrowers are penalized a by being shut out from the borrowing.) Well I guess if your goal is to maintain tax revenue and the solvency of mismanaged financial institutions at the detriment of the public this BOLD Option is palatable. this will not stop unaffordable,overpriced housing from falling it will only penalize the borrower a second time. Oh by the way, the firms that agree to this mass restructuring will have a difficult time raising funds in the capital market through securitization and increase the cost to access funds for those who have good credit. These firms will make the money they lost on this restructuring plan, think of how insurance companies raise premiums after natural disasters.

[Rob]

Looks good in print, not on paper. We have already concluded if they can’t pay now, they won’t be able to then. What's the purpose? Will they last till next November.......to be continued.....

[Jax]

It's as though The Three Stooges were working for the government and coming up with these looney ideas. Most of these fools bought these homes because they thought they were going to get rich from an ever-appreciating asset...........and they could use as an ATM to fund their foolish spending habits. How many people do you think will stay in those homes (even at the teaser rates) now that they have lost value and are a continually depreciating liability that costs $$$$$ to maintain?

[Cal]

Servicers can't do anything not defined by their servicing agreements (since they don't usually own the loans). Loan modifications aren't usually allowed without the homeowners going into to default. But lets say the bondholders agree to allow mods without defaults if the homeowner proves hardship, the agreement is still "We will freeze the interest rates if the borrower hasnt missed a payment and if they contact us before reset saying they cant afford it". I bet that just doesnt happen that often.

http://www.newsweek.com/id/71535

Newsweek had an interesting case regarding a borrower who got a loan mod (due to job downgrade) but the servicer started including the escrow payments which they didnt before. The servicers are in a tough spot, they have to make up for lax underwriting after the loan is closed and reunderwrite and try to make it where it fits within their modification parameters and the borrower can (barely) afford it.

I think in many cases the reset is just accelerating the inevitable. But with the mortgage market becoming so illiquid every default is chasing money away, so even if mods wont solve the longterm problem (the borrower is most likely to lose the house anyways) it will buy people some time to deal with the issue.

[Tombstone Realty]

So, *now* they want to do income verification. Bit late in the process, don't you think?

[Paul Hiller]

This so called fix is just window dressing. Very, very few will qualify. Will re-fi’s qualify? I think not. They are referring to 2-28s that are resetting. Almost all were 80-20s, stated, and the borrowers were hoping for the miracle of appreciation to put off judgment day. The key statement is "proving" they can't afford the reset. 90% of the borrowers will not be able to prove they can afford the "pre-reset", much less the post reset payment. Once they really show income the lenders will be off the hook. After all, the application is full of misrepresentations. Shocking! This is good photo opportunity and nothing else.
Next crisis please.

[perks]

This only makes me regret NOT jumping into a suicide mortgage I knew I really couldn't afford and, instead, waiting until I could reasonably manage a good ol' 30-year fixed. Thanks, Arnie, for showing me what a fool I've been.

[MyLessThanPrimeBeef]

My Austrian on-the-brink-of-quitting-real-estate broker just called me up now to say 'I vill be back!'

[allsouledout]

Silly me ... I thought stupidity was only rewarded if you were a celebrity ...

[screwedagain]

I thought I was being fiscally responsible and prudent because I knew I couldn't afford a house unless I went with a adjustable rate, interest-only loan that would reset into a payment I ultimately wouldn't be able to afford.

I guess I was the idiot - there are no consequences for making bad decisions anymore. I will definitely not be teaching my children to be financially conservative the way I was taught, that's for sure. Saving money, working hard, delaying gratification - these aren't virtues anymore... they're liabilities.

[jdj]

Two issues:

1. What about IO loans and Option ARMs? Do these features of the loans get frozen as well? The interest rates are the least of the problem, it's when these people have to start paying principal or at least all the interest that they crumple.

2. This idea for freezing rates will never work. It will drive yields up on all future mortgage loans. What lender (or investor) will want to make an ARM in the future if they think that their yield can be frozen. They will demand a big spread up front.

[Trevor]

Wow, this blog really is completely populated by individuals who are dying to see the market collapse. It seems to me that if the lenders such as Countrywide feel it is in their best interest to give individuals the option to possibly hold onto their homes it is a win win situation for the homeowners and the lenders. The lenders continue to have their interest payments made and are not forced to lose money on a foreclosure. The home owner doesn't have his credit totally ruined and keeps his family in a home. Gee, what a terrible idea.
Land prices certainly could adjust downwards for the greater good but what people forget is that there is an extremely high cost of building and servicing a home in California. There also, believe it or not, is not an unlimited supply of land in the LA area. There are a hundreds of thousands headed this way in the next few years so if you're expecting long term prices to drop like like we're in Dogpatch Nebraska, you're dreaming.

[AJ]

Wonderful comments on this thread.
. I have been watching this blog for a while.
As the last post said... "there are no cosequences for bad decisions anymore". And a previous post mentioned that escrow had not been included in the payments.
These are all leading up to a very difficult time approaching. I commend the Governor for attempting to help but unforunately the situation is very complicated and will take some time to sort thru.

[upthecreek]

"Wow, this blog really is completely populated by individuals who are dying to see the market collapse"

Sorry Charlie.. This blog is full of people that understand the government is only trying to put off the inevitable These loans are toxic and nothing will change that , NOT EVEN ARNOLD and ANGELO....
GET REAL!!!!

[Brother Joe]

Lenders have no choice! They created this mess...they have to mend it...
Most bloggers are blaming the Borrower who was offered a "Defective Product"...

I see this more like a "Recall" on the Automotive Industry...Borrowers did not come up with the "Mickey-Mouse" loan products...

Lenders should have known better...Selling a faulty product will get you in trouble...If it wasn't for them, we would not have a "Meltdown"...

We need a "Stable Real Estate Market"....If you are looking for a low price...well...move to Midwest...Nobody owes you anything...

Prices in California will always be high...Our Population is not decreasing last time I check...

[Christopher]

I hope the house price goes back to 1999 as well as the rental. I already had a hard time paying the 2 bed room appartment since the house price increasing so crazy. Why does the governor not to tell the lenders to give free money to all the tenants for paying the rent? As the old says, this country is the most richest country in the world. Why now a day american people have to suffer paying the rent like me????????????????? No christmast and no thank giving. We are in africa ! ! !

[yourkillingmelarry]

"Land prices certainly could adjust downwards for the greater good but what people forget is that there is an extremely high cost of building and servicing a home in California. There also, believe it or not, is not an unlimited supply of land in the LA area. There are a hundreds of thousands headed this way in the next few years so if you're expecting long term prices to drop like like we're in Dogpatch Nebraska, you're dreaming."

You know all of those things were true when home prices were about half of what they are now only 6 to 7 years ago. What happened? did the population double, did everybody get a 75% to 100% raise, did everybody in LA win the Lotto? No! Prices were artificially inflated due to what is probably the largest credit bubble in history. The housing boom of the last 5 years was not real! Regarding the several hundred thousand people heading this way....wrong. S. California is experiencing a net out-migration as a result of this debacle. Population growth is coming from babies and non-monied immigrants. Prices will drop, they are dropping and will continue to drop for at least a few years.

[Stop the insanity]

"Wow, this blog really is completely populated by individuals who are dying to see the market collapse. It seems to me that if the lenders such as Countrywide feel it is in their best interest to give individuals the option to possibly hold onto their homes it is a win win situation for the homeowners and the lenders."

No, we don't want to see the market collapse. We want to see the market correct itself to a reasonable level. The housing prices are currently insane. They are not linked to market fundamentals, they are linked to all the easy funny money that was doled out. To let these people stay in their homes at the teaser rates completely punishes people who did the right thing and did not buy a house they knew they couldn't afford. Pricing hard-working and ethical people out of the market is not win, win.

Maybe its time to do a total recall for Arnold. It helped him get in, maybe its time to kick him out if he can't see how he is screwing all the people who are actually financially responsible.

[Tbone]

I don't understand the anger against the gov, the lenders and lendee's as it relates to this story. Are there taxpayer dollars being used? I only read Peter's main post, but I didn't see anything in there about state dollars being spent. This post only says that the lenders will freeze rates at the initial APR. What's wrong with that?

[Trevor]

"You know all of those things were true when home prices were about half of what they are now only 6 to 7 years ago. What happened? did the population double, did everybody get a 75% to 100% raise, did everybody in LA win the Lotto? No! Prices were artificially inflated due to what is probably the largest credit bubble in history. The housing boom of the last 5 years was not real! Regarding the several hundred thousand people heading this way....wrong. S. California is experiencing a net out-migration as a result of this debacle. Population growth is coming from babies and non-monied immigrants. Prices will drop, they are dropping and will continue to drop for at least a few years."

It strikes me that land in just about every part of the world saw the same ramp up in values that California did. I know that in Canada prices have at least doubled. Same for Europe and there isn't this panicked sell-off for some reason. Doubling of an investment in six or seven years is not an unheard of rate of return. If you put money into a investment at 10 percent you will double it in about 6 years. After everyone recognized what a scam the stock market can be they moved into real estate. I hate to get political here but I really think the drop in prices in the US is a vote of non-confidence in the current president and his policies. 2008 will bring improved confidence in the future and land will stabilize. Just you watch.

If you're trying to tell me that population growth in California is only fueled by poor immigrants I'll have to take your word on that but usable land in LA is getting scarce and people love the climate, especially aging boomers with creaky bones. And what are borrowing rates sitting at again?

[MyLessThanpPrimeBeef]

They said the same things about Roman real estate too, especially those on the slope of Palantine Hill, when the prices went crazy and stayed there...for a while - great Mediterranean weather, compared with, say, that of Trier in Upper Rhine or Londinium, best entertainment in the whole empire at the Coliseum, far more interesting than our own puny Hollywood, and eveyone wanted to be there in Rome, not just the poor arthritic Gauls, Celts or Goths, but also rich tin mine owners from Spain, grain tycoons from North Africa and sexy queens from the Land of Phaoahs.

There were millions in Rome and as powerful as the Roman Republic and later the Roman Empire, they weren't in the business of making more land either.

So, what happened?

Some son of a Sun worshipper decided to move the capital, took all the senators with him and there went the real estate.

And a good lesson for us Angelenos lest we become too cocky.