Subprime Interest Rate Freeze: More Hypocrisy

Includes: DIA, QQQ, SPY
by: TraderMark

Wow. How bad can things be when the kings of free markets are involved in stopping the process.... amazing times we live in. They fight regulation at every turn, but when the market has to cleanse itself, they step in and stop the process. True hypocrisy. And in return, what will these banks get? Let me guess, an implicit promise to be bailed out by the Fed. Everyone is a winner... lovely.

Sadly its not subprime that is the main issue folks - but I suppose this will help people who are making $45K and live in $500K homes for $1200 a month continue the charade. This is simply going to drag on the process. Subprime is just the tip of the iceberg - many (most) of those people should not be in homes because they cannot afford it, period. And when their houses drop in value they will still be upside down.

US Banks in Plans to Free Suprime Rates - WSJ

  • The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations.
  • An accord could reassure investors and strapped homeowners, both of whom are anxious as interest rates on more than two million adjustable mortgages are scheduled to jump over the next two years. It could also give a boost to the Bush administration, which is facing criticism for inaction amid the recent housing turmoil.
  • The plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies including Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. People familiar with the talks say the individual members have agreed to follow any agreement reached by the coalition, which is called the Hope Now Alliance.
  • In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.
  • Under one scenario, the freeze could run as long as seven years. The parties are developing standard criteria that would determine eligibility. The criteria should be finalized by the end of year.
  • While the government can't force the industry to modify loans, Mr. Paulson and other administration officials have been using moral suasion to push for workouts, telling the companies it is in their interest to avoid foreclosure since most parties can lose money when that happens. A similar plan to freeze interest rates temporarily was recently announced by California Gov. Arnold Schwarzenegger and four major loan servicers, including Countrywide.
  • Among the holdouts have been investors, who typically hold securities backed by mortgages. If interest rates are frozen, they would lose the potential benefit of higher payments. But investors have cautiously moved toward cooperation, likely on the grounds that it's better to get some interest than none at all.
  • Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups: those who can continue to make their payments even if rates rise, those who can't afford their mortgages even if rates stay steady, and those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates. Only the third group would be eligible for help. (I'd love to see how they determine who belongs in each group) The creditors are likely to look at whether the borrowers have equity in their homes, despite falling house prices, and whether their incomes are holding steady.
  • Mr. Paulson, who is philosophically opposed to federal meddling in markets, at first rejected a sweeping approach to loan modifications when the idea was floated by Federal Deposit Insurance Corp. Chairwoman Sheila Bair. But he shifted his position recently. He told The Wall Street Journal last week that it would be impossible to "process the number of workouts and modifications that are going to be necessary doing it just sort of one-off."
As says - this is the same Paulson who said in April ""All the signs I look at [show] the housing market is at or near the bottom.""

Oh well I give up. Next time houses are rising 25% a year, I am going all in with 0% down, no doc loans and amassing 50-100 properties. As long as I provide I have an income I should be cool since they will lock me into my 1% ARM rate for 7 years. I'm in (next time). How stupid were we who sat by watching the speculation go on, and not partaking knowing the house of cards would fall. Dumb dumb dumb. Risk aversion is for the uncool kids!

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