Is the big news this week the subprime rate freeze plan announced by the Bush administration? Or is it another political red herring? At first glance, it sounds really good, but let's look a little further into the story. The number of people who will qualify for the five-year rate freeze on their subprime adjustable-rate mortgage is relatively small, up to 600,000 Nationwide. It is estimated that over 2 million homes in the US are going to be at risk of foreclosure in 2008, as the teaser loans taken out in 2006 reset. Borrowers who can qualify for the interest rate freeze have little or no equity in their homes and credit scores less than 660. The likely-hood of foreclosure for these people is still high. Investors who were counting on making a profit off of the rising interest rates will end up losing on their investment and might deter investors from buying those bonds in the future, and that could make it harder to get mortgages. The impact could be huge. In an article in the San Francisco Chronicle, G. Marcus Cole, a professor at Stanford Law School, stated "It strikes me as more of a rhetorical or political device than a financial device. It provides some type of cover for servicers that want to take that step but need some source of authority," But it also sends the wrong message, "It gives a sense that the government ought to be engaged in rescuing borrowers in this particular category. It also conveys the message that foreclosures are a bad thing or unhealthy. Foreclosures are a natural part of market discipline. If you take out the impact of foreclosures you have reduced the stick that stands behind the commitment to pay on the mortgage. I would think this would make the markets nervous. This is very interventionist, even to the extent it's voluntary." This Week's Real Estate Insight: Maybe the President should have been wearing his fight suit when he announced this one, only time will tell…Mission Accomplished?
- By Michael McCann
- Posted
Is the big news this week the subprime rate freeze plan announced by the Bush administration? Or is it another political red herring? At first glance, it sounds really good, but let's look a little further into the story. The number of people who will qualify for the five-year rate freeze on their subprime adjustable-rate mortgage is relatively small, up to 600,000 Nationwide. It is estimated that over 2 million homes in the US are going to be at risk of foreclosure in 2008, as the teaser loans taken out in 2006 reset. Borrowers who can qualify for the interest rate freeze have little or no equity in their homes and credit scores less than 660. The likely-hood of foreclosure for these people is still high. Investors who were counting on making a profit off of the rising interest rates will end up losing on their investment and might deter investors from buying those bonds in the future, and that could make it harder to get mortgages. The impact could be huge. In an article in the San Francisco Chronicle, G. Marcus Cole, a professor at Stanford Law School, stated "It strikes me as more of a rhetorical or political device than a financial device. It provides some type of cover for servicers that want to take that step but need some source of authority," But it also sends the wrong message, "It gives a sense that the government ought to be engaged in rescuing borrowers in this particular category. It also conveys the message that foreclosures are a bad thing or unhealthy. Foreclosures are a natural part of market discipline. If you take out the impact of foreclosures you have reduced the stick that stands behind the commitment to pay on the mortgage. I would think this would make the markets nervous. This is very interventionist, even to the extent it's voluntary." This Week's Real Estate Insight: Maybe the President should have been wearing his fight suit when he announced this one, only time will tell…
