The Freeze & The Hope

By Dave Fratello | December 6th, 2007
Today the Mortgage Bankers Association announced that foreclosures have hit an all-time high nationwide, and they project an increasing rate of foreclosures in the coming months. Prime loans are also turning to crap at a rate 2/3rd higher than last year.

So it was a perfect day for the President of the United States to ride to the rescue.

The president and former Goldman Sachs CEO Henry Paulson (currently Treasury Secretary) encouraged major lenders to join them to announce broad-scale relief to recent home buyers with toxic loans. The big item that was new today – The Freeze.

You can qualify for a 5-year rate freeze on your adjustable-rate loan if you:
  • Have income
  • Have a FICO score under 660*
  • Live in your home
  • Have made all payments so far
  • Took out your loan between 1/1/05 and 7/31/07
  • Have a loan that resets between 1/1/08 and 7/31/10
  • Have a home worth more than the mortgage amount
  • Are at risk of default upon reset of the rate
The two variables that matter are home value – initial LTV being a big issue – and risk of default. (It's hardly a universal program.)

Do you think there are some recent home buyers in MB who could qualify for a freeze? We'd be surprised if there weren't some.

Here's a tip: If you want the rate freeze, you might want to have one spouse quit work ASAP, making certain your risk of default is more obvious. Oh, and slow-pay some credit cards to drop your FICO. Those moves could save you $50k-$100k or more over 5 years.

Are we suggesting that people might game the lenders to get a benefit they're not entitled to? It would seem so. But who is really "entitled" to a fix for their toxic loan, anyway?

There's plenty of commentary out there on the reasons this plan came together. (Theme: it's only a little bit about the actual homeowners with the toxic loans.)

MBC is highly sympathetic with the argument that the plan rewards uncautious home buyers and effectively punishes people who made responsible financial decisions regarding housing in the last few years. PIMCO analyst Mark Kiesel says the plan a "reeks of moral hazard" and calls it "pure politics" that "is going to prolong the bubble."

And we note that the president rather flatly contradicted himself in announcing the plan today:
  • "Responsible" Bush: "we should not bail out... those who made the reckless decision to buy a home they knew they could not afford"
  • "Softy" Bush: "there are some responsible homeowners who could avoid foreclosure with some assistance"
Oh, Mr. President, your whole plan addresses a universe of "responsible homeowners" who obviously made a "reckless decision" and need help to avoid foreclosure when their contractually agreed-upon mortgage terms kick in.

The bottom line questions for our local market include:
  • How many folks in MB might qualify for, and seek, a free rate freeze?
  • How many MB homeowners will avoid a forced sale in 2008-2010 that would otherwise have come about due to resets and recasts on their loans?
We have previously speculated that the real impact of loan resets would begin in MB in the Spring of 2009. (See here and here.)

The Freeze doesn't eliminate the core problems that might lead to more forced sales (in MB or in the broader RE market), but potentially postpones them. Of course, if no MB homeowners qualify for The Freeze, MB gets no protection. (Kiesel draws an analogy to Japan's efforts to stop a similar correction, which simply extended the correction over a much longer period of time.)

Underlying The Freeze is The Hope.

That's the hope that the bleeding is slowed long enough for Republicans to avoid being punished at the ballot next year, and the longer-term hope that house prices will recover and begin increasing again before those 5-year freezes expire.

Oh, yes, if the market rebounds, everyone can simply re-fi when their freezes expire. Who is that not good for?

* The original version of this story said homeowners must have a FICO of 660 or above. In fact, it's 660 or below to qualify. Darned secondary source let us down – oh the rush of news. This story was rewritten to adjust for this fact.

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