Is there something in the works that would help my friends? The built a new house in MI in 2003, then bought a cheap condo in Orlando for an investment (currently rented to a family member who covers all expenses). Then a year and half ago, got a job offer in FL, moved down there and bought a house.

The MI house has been leased since a few months after they left but no commitment from the renters as to buying the property. Their taxes on the MI property have jumped significantly due to them no longer being permenent residents.

Now my friend tells me their ARM on the MI house will expire in Jan and their payment will jump $900 a month. The house has lost probably $50,000 in value since they built it. They are talking to the lender about a short sale to get rid of the property. Her belief is that a short sale only affects your credit slightly and for 18 months. She also stated that they cannot touch your 401K's. I am assuming they no equity in either FL property they own.

I am wondering if the government convincing lenders to freeze ARMs wil help them in any way (if they qualify).

"and alos not fair to the multitudes of home buyers who purchased in the last several years with fixed rates and/or adjustable rates who could AFFORD them"

Perhaps, but as a responsible home purchaser I am bothered by the idea of dozens of foreclosures in my subdivision driving my property value down (further) and think maybe some sort of rate freeze would be less objectionable.

"Heck, i'd like to recast my loan to a 3-4% "teaser" if it wouldn't increase, as proposed"

From what I've read so far, most subprimers had teasers of 7% or higher. Their resets will push their loans into the 10-12% bracket. BUT, do you think this might also be a dress rehearsal for when all those Alt-A and prime I/O's and Option ARMs come up for reset? My understanding is those loans carried the really low teaser rates. Although, I would think most of those teasers would have already expired.

My moral rage is reserved for those specuvestors who may benefit from rate freezes now or in the future.

Qdog, I think this action is motivated by fear for the health of the banking and financial system more than a desire to help ailing subprime homeowners. We have no way of knowing how may borrowers the alliance will actually save. Frankly, I hope it helps...mass forclosures aren't good for any of us. I honestly don't know why extending the loan term wasn't embraced. Perhaps, they're saving that play for when the I/Os and Option ARMS face both reset and become fully amortizing.

Livvysmom, no disrepect meant for your friends but are their loans subprime? Do you think they should be helped? Their decisions seem a bit unwise. At any rate, money sheltered in retirement vehicles is usually protected from any type of recourse action.

Do you all believe rate freezes will help home values or do you think further deflation is inevitable?

The FDIC elaborates on the rates proposl before the House...well worth reading in its entirety:

"Some have expressed concern that restructuring subprime loans to a fixed rate of interest at the starter rate will result in a windfall for subprime borrowers. This misconception is based on the belief that the starter rates for these loans are similar to the low 1 to 2 percent "teaser" rates that were aggressively advertised for prime borrowers. In fact, of subprime hybrid mortgages originated in the first quarter of 2006, the average starter rate was 8.28 percent, which exceeded the average rate on subprime fixed rate loans made in that same quarter (7.93 percent), and was well above rates paid on prime fixed rate loans. These subprime borrowers will continue to pay higher subprime rates even after restructuring."

Here is a link that might be useful: FDIC Testimony on Loss Mitigation

Wow,it was my understanding that "teaser" meant below market rates,that would adjust upward..Never gsve much thought that teaser rates would be higher then existing rates at the time of loan...Now i have no sympathy to either the buyer of such loans,or those who wrote the loans...What in the world were people thinking taking out loans that would quickly increase to levels much higher then the average 30 yr fixed rates????

"Never gsve much thought that teaser rates would be higher then existing rates at the time of loan..."

It all depends on how credit worthy you are.
For someone with very poor credit, darn near ANY loan would be a teaser compared to what they would get on the open market.

Both sides still deserve what happens.

The difference between the payment on a 30-yr mortgage vs. a 40-yr mortgage is rather small.

For example, 100K financed at 6.5%

30-yr: $632
40-yr: $585
Interest only: $540

If only we could tap the bank accounts of the mortgage brokers who made bonuses by steering people into these things. Many qualified for traditional loans.

I don't understand why the 'answer' is not to go case by case, weeding out the unqualified and moving the rest into traditional mortgages.

Most frightening is "Bush to the Rescue" -- Can we guess WHO will be 'rescued'?

"Both sides still deserve what happens."

What about the innocent bystanders? Suppose the value of your house is hurt by too many foreclosures nearby, or if the value of your bonds is hurt by too many defaults, or the value of your stocks is hurt by a recession, well, you get the idea...

Pretty much what I predicted on this forum would happen -- borrowers with good payment records and steady incomes will have their rates frozen. But the freeze will only last a few years when, I assume, their rates will go back to being adjusted upward. I guess the idea is that this programs will prevent panic selling, cut back on future foreclosures and help stabilize housing prices.

The type of borrowers who will most likely benefit from the program is that significant group who could have qualified for a conventional loan, but instead were steered into subprime loans by unscrupulous lenders like Countrywide.

The borrowers it won't help are those who gambled on rises in house prices and bought way more than they could afford by using exotic mortgages, like interest only and negative amortization. Also those buyers who were fraudulently induced into taking out mortgages with payments they couldn't possibly afford.

To the extent the program actually prevents prevents some foreclosures, that would help the housing market. But to answer novahomesick's questions, while I think this could help housing prices to some degree, I also think further declines are inevitable. The problem is much bigger and wider than this program addresses.

I don't know enough to say how it would affect the ongoing credit crunch. That's really what's causing the greatest damage to the economy. Anyone have an opinion on this?

"I don't know enough to say how it would affect the ongoing credit crunch. That's really what's causing the greatest damage to the economy. Anyone have an opinion on this?"

It depends on what the outcome from the Treasury NOT taking action would have been: if the result would have been that foreclosures became rampant, then credit would have tightened even further. If the result would have been that most borrowers continued to keep their loans in good standing, even after resets, then credit would have loosened.

Instead we're getting a bit of certainity thrown into the mix: investment returns will be moderate, and thus so will credit (on this small part of the market affected by Paulson. In reality the effect could well be too small to measure).

I think for the most part this is just some hand-holding to keep investors and creditors away from panic. Its mostly symbolic.

This is a great topic you guys have a lot of information about interest rates. Thank for all the information
Michael

Here is a link that might be useful: U Can Sell your Home Quickly

"Suppose the value of your house is hurt by too many foreclosures nearby, or if the value of your bonds is hurt by too many defaults, or the value of your stocks is hurt by a recession, well, you get the idea..."

You only have a problem if you need to sell.
If you purchased stocks or bonds directly affected by RE prices you are an investor.
Not all investments make money.

It's not that simple. It's difficult to borrow right now because of lack of liquidity in the credit system. Many lending banks have failed and others have taken huge financial hits. We are starting to see the big banks selling equity positions to foreign investors in order to get enough money to stay in business.

The credit crunch doesn't just affect mortgage borrowers. It's also spread to commercial and government borrowers. This means that businesses are having more trouble borrowing money to finance things like future expansion. The same is true of state and municipal governments. They are having to pay higher interest rates on the bonds they're floating to build new schools and the like.

All this bodes ill for future economic activity. The US economy runs on freely available credit. If the credit pipeline continues to dry up, a major recession is almost inevitable.

Mind you, this isn't a prediction on my part. It may be that the US economy in general is robust enough to absorb these blows.

Or maybe it isn't.

feedingfrenzy -- IMO, it isn't.

A news story today details how Illinois jobs are paying less. Although Illinois has one of the better median incomes amongst states (near $50K), it is second only to MI in this regard: Fewer new jobs being created; fewer well-paying new jobs; less pay for existing jobs.

By contrast, isn't it a big relief to the US and Iran to know that neither is about to attack/be attacked? (Rolls eyes.)

We have an ongoing debate in our household as to whether the "credit crunch" is a true liquidity problem or a solvency problem. I lean toward the latter. I think Paulson and the Hope Now team are trying to engineer an orderly unwinding of a financial crisis that will reverberate throughout the financial system and the economy. This is way bigger than foreclosures hurting home values. (The linked article in today Washington Post summarizes our current mortgage financing system/crisis)

It seems to me that any plan that allows a third-party to modify mortgage bond contracts will have a negative impact on the secondary market for mortgage loans. Bonds are supposed to be far less risky than stocks. If you were a mortgage bond investor that expected a certain payout, would you go near these things if you knew the payouts carried such high risks? So, does this create a stall in new mortgage lending? Do mortgages have to be repriced to account for higher risks...making them more expensive to the borrower? If so, it will exert further downward pressure on home prices.

The economic bright minds out there aren't ignorant of possible ramifications. IMHO, Fannie and Freddie are being eyed to take over securitizing those parts of the mortgage market that may lock up. Given their recent scandals, I'm not sure they're ready. But, that's another story.

Anyway, the downward pressure on home prices will continue. In markets that saw huge run-ups, would this be such a bad thing? I read recently that only 14% of the housing stock in my area is affordable to middle income people. Do I really want to live in a community that is unaffordable to police, firemen, teachers, medical personnel etc? Do I want to see young families (my kids included) take on risky loans or be shut out from owning a nice home? I find it disturbing to see such a wealth transfer to my generation from my kids' generation. They face so many economic challenges.

Aw heck, maybe I should just change my User Name to novechickenlittle.

It would be wonderful if our housing crisis could unwind with minimum damage but I don't know...

Here is a link that might be useful: It's Not 1929 but It's the Biggest Mess Since

"Anyway, the downward pressure on home prices will continue. In markets that saw huge run-ups, would this be such a bad thing? I read recently that only 14% of the housing stock in my area is affordable to middle income people. Do I really want to live in a community that is unaffordable to police, firemen, teachers, medical personnel etc? Do I want to see young families (my kids included) take on risky loans or be shut out from owning a nice home? I find it disturbing to see such a wealth transfer to my generation from my kids' generation. They face so many economic challenges."

Firemen and teachers in my area generally rent, unless they bought their home years and years ago. Police around here generally don't want to live in the same areas they work in for fear of criminal reprisals on their homes.

I think the path to "fairness", however squishy that term may be, would be if housing prices rose at only the inflation rate for a long while, while incomes rose at a rate a little above the inflation rate for a long while. Of course, rising incomes will lead to rising inflation, so there are no easy answers...

"It's difficult to borrow right now because of lack of liquidity in the credit system."

I also disagree with this. Borrowers who can qualify for a mortgage can get a mortgage these days. They may have to document their income and put down a downpayment - Horrors! Very few 100% loans left!

We are back to lending to qualified borrowers, instead of saying yes to everyone. We are back to lending money the way we did 6 or 7 years ago. Where we looked at a borrower's Credit, Capacity & Collateral.

There are still loan programs out there for most borrowers, except those who truely should not be buying a home.

Mfbenson...I like your thought.

"I think the path to "fairness", however squishy that term may be, would be if housing prices rose at only the inflation rate for a long while, while incomes rose at a rate a little above the inflation rate for a long while. Of course, rising incomes will lead to rising inflation, so there are no easy answers..."

In many areas that saw a modest increase in home prices, achieving a balance between the price of homes and incomes might work. But in others, the housing inflation was so huge that it will take years for incomes to catch-up. Between 2000-2006, my county saw a 22% increase in median income, a 26% increase in median rents, and a 146% increase in median home prices. Even if prices go flat, it will be years before income catches up. So, I think we'll see some unknown combination of housing deflation and income increases over a long period of time...depending upon geographic area.

Now, if I were Queen of the World, I'd pick up my fairydust- fueled wand and give everybody a GIANT pay increase paid for by this year's Wall Street bonuses.

pamghatten

You are focusing far too narrowly. If the fallout from the mortgage fiasco could be confined to the housing sector, that would be one thing. But it can't because it's created an economy-wide credit crunch. Don't forget that there are many other categories of borrowers than people who want home mortgages, and these other types of borrowers must compete with each other for dwindling supplies of money available to loan.

For example commercial real estate has already suffered from the credit crunch because its gotten more difficult to finance activities such as building new office buildings or buying existing buildings.

Companies seeking to expand their businesses by building new facilities or buying up other companies normally finance these activities by borrowing. That is getting harder and more expensive to do.

Governmental entities who need to build schools or roads or whatever normally do so by floating bonds. Since underwriting standards have tightened, they will likely have to pay higher interest rates to get anyone to to issue them. That will cost the taxpayers more money. Or maybe the schools and bridges just won't get built.

These are just a few examples. The spillover from the subprime debacle has created an economy-wide credit crunch. That credit crunch, rather than what specifically happens to the housing market, is what threatens the whole economy and keeps many economists awake at night.

We also must remember there will always be areas where the average income level will never afford the mdian home price...I say with 99% ceratinty places like NYC and San Francisco will not drop far enough whereas the "avergae joe" could comfortably afford them..Also in high priced areas,most purchasers have lived in the area, and "trade" up their overvalued smaller home for an overvalued larger home..If you come from the Middle of the country and try to buy on either coast(for the most part)your appreciation from your home to a newer one on the coast won't work..

"It's difficult to borrow right now because of lack of liquidity in the credit system. "

Not if you are well qualified and have a significant down payment.
I have closed 3 mortgages in the last week on investment properties.
Put 25% down on even 'distress' properties and the financing is there.

Question to those of you who have very recent loan experiences: Are affordability products (I/Os, Option ARMs, piggybacks) still being written for those with excellent credit?

Freezing rates is a bad idea.

If you had money to lend someone to buy a house and you just saw that the US Gov't went in and changed the conditions of the contracts that other lenders had w/ borrowers w/o getting your permission (i.e. reducing the value of your investment) wouldn't that make lending money to borrowers more risky to you? Wouldn't you demand more return on this invstment because it is now a more risky invstment? So interest rates for mortgages are going to go up for everybody. As mortgage rates go up, home values will come down.

Housing prices spiraled up for a long time and now they are starting to spiral down.

brickeyee

You, like pamgahatten, took this single sentence out of context and apparently ignored the rest of my post, which was SPECIFICAALY addressed to the impact of the credit crunch on non-housing sectors of the economy.

As I have explained twice before, the impact of the credit crunch is much broader and deeper than just its effect on the housing market. Credit has tightened up for all classes of borrowers, including commercial and municipal sectors. If this continues and accelerates, it threatens to slow economic activity to the point where the US economy will go into recession. Indeed, some economists already think that's inevitable.

Read my prior posts if you need more details because I'm not going to repeat them again.

BTW, there's certainly loan money available for qualified buyers in the residential real estate market. For example, in early September, my DD and SIL got immediate approval on a conventional 20% down, fixed-rate mortgage for their first home purchase in Wash, DC. Interestingly, the money came from a savings bank, not a mortgage company, and the mortgage has since been sold to . . .

who else but Countrywide?

The linked article is from yesterday's NY Times. Looks like many who are subprimers won't be eligible anyway.

Sometimes it feels like many of the current policies are just for "show" and don't really end up helping anyone but those seeking office. Clearly, I'm already worn out from all the campaign nonsense and we still have a little under a year to go :(

Here is a link that might be useful: NY Times on mortgage rate freeze

'If you had money to lend someone to buy a house and you just saw that the US Gov't went in and changed the conditions of the contracts that other lenders had w/ borrowers w/o getting your permission (i.e. reducing the value of your investment) wouldn't that make lending money to borrowers more risky to you? Wouldn't you demand more return on this invstment because it is now a more risky invstment? So interest rates for mortgages are going to go up for everybody. As mortgage rates go up, home values will come down."

One clarification -- the government isn't "changing the conditions of the loans": the banks will be. The intent of the Bush plan is to apply some pressure to get more of them to agree to do so voluntarily. Don't forget that some lenders have already been doing this with some subprime borrowers.

Actually, freezing rates makes the investment less risky because it will lower the default rate. It does, however, mean that the investors will get a lower return on their investment than they expected. I'd guess that a lot of them would prefer to get a less spectacular rate of return on their investment than no return at all.

I have heard that many state pension funds, and particularly Florida, are extremely concerned about huge losses if the tide of defaults continues to rise. In the hopes of stemming their losses, they have been urging more government intervention.

It now appears that many investments that the pension managers, as well as other investors, thought were conservative actually have some money invested in the subprime loan market. This includes many big MMFs run by huge investment firms like Fidelity. So it looks like some of our MMF investments may not be quite as secure as we thought.

novahomesick: "If you were a mortgage bond investor that expected a certain payout, would you go near these things if you knew the payouts carried such high risks?"

Good question...because that is EXACTLY what the mortgage bond investors have been doing for the last three years or so.....as they full well knew that home prices would not continue to escalate at such dizzying paces, that most people canÂt reasonably afford homes even at normal interest rates, and at some point in the near future, when the reset date comes, most of these loans would then become non-performing. However...they did so anyway.

That said...they already got their billions in bailouts...2 CEO's of 2 of the major players in the scam (Citigroup & Merrill) walked away with millions....as did an untold number of hedge fund folk....and all of the various interrelated cohorts.

And....I'm sure that there will indeed be Wall St bonuses galore this year regardless....

Now, a handful of homeowners...aka the lowest part of the pyramid...get a little bit of a reprieve while the top level of the pyramid laughs all the way to the bank....and the Bush administration has been successful in diverting the attention and wrath of the public to those ill advised homeowners instead of where it truly belongs....the legalized scam of Wall St finance.

All the better to repeat the performance again in a different permutation in the not too distant future....
Yesterday...S&L scandal..dot com bust..
Today its mortgages.

Blame anyone and everyone involved,plenty of blame to go around..that said, homeownership is NOT a right, and unfortuneately many people took on debt they had no way of ever repaying,sure some were misled, but many were not...And this new proposed plan does just about nothing to help the housing market...

Its much ado about nothing, or almost nothing anyhow. From today's WSJ: "To screen out speculators, owners would have to live in their homes. The plan applies to loans originated between Jan. 1, 2005, and July 31, 2007, that reset between Jan. 1, 2008, and July 31, 2010. Office of Thrift Supervision Director John Reich said this week that the plan could help "tens of thousands" of homeowners."

Tens of thousands... out of the 105.5 million or so households in the US is a tiny sliver. The housing market will not be noticeably affected, and this is all just feel-good politics for Bush, whom I suppose is hoping will rub off on whatever candidate snags the Republican nomination.

I tend to agree with logic and mfbenson.. There's not enough beef in this plan to make all that much difference.

I think that it is strange that some can plainly see the flaws in the lending system (which obviously need to be "corrected") while nearly totally overlooking or denying its sister problem of inflated home prices (which obviously need to be "protected"). I don't see how both can possibly be achieved.

I know that market conditions are different everywhere but here is an example of what unsustainable lending and market assumptions/attitudes have created here:
In my town of about 20,000 (the largest for about 60 miles) there are 325 houses for sale under 750k and very few over. The median household income is about 35k. What used to be seen in the past as sound budgeting advice was to look for a house that was priced at around 2.5 times your gross annual income. Guess how many of those 325 houses fall into this range ..... 2! Lets try 3x and under ..... 8! 4x and under .... 33! Population growth over the last year is near 0. Last year at this time there was around 3 months of housing inventory, this year 10 and obviously growing.

I think that the base of the pyramid has been completely wiped out. Who is left to buy these houses after lending practices have been changed especially at the "low end"? I don't think prices have risen so dramatically in recent years because all the people with spotless credit and sizeable downpayments have ran them up. Increased supply + reduced demand = lower prices.

Perhaps people should pay for their own mistakes. If a house in your neighborhood is reclaimed by its owner maybe in a few weeks-months-years someone who can manage and pay their bills will be living in it and all will be well and fair - problem corrected.

The investment properties I have recently closed on all came from the 'flipper' crowd looking to cash in
I purchased for significantly less than the previous sale price in each case.
Some sellers lost equity, many lost more (one guy lost his other investment properties with decent equity to make up the shortfall).
Banks are not nearly as forgiving of investors as owner-occupants.

I had mostly stayed out of the market during the price 'frenzy' fed by low loan rates and unqualified buyers and investors.

They have taking their lumps now and are likely to continue for a while longer.
More responsible parties (investors & owner-occupants) will gradually absorb the properties.
While RE looks to be 'easy money' that is only in rapidly increasing markets, and they NEVER last very long before slowing.
The last buyers than take a beating as they wait for more normal market increases to catch up to the excessive prices they paid.
Until recently RE was not regarded as a 'short term' investment.
Holding less than 5 years was very unlikely to produce decent returns (if any return was realized) and investors acted based on this.

Yes, this market is certainly a good opportunity for qualified buyers.

I am beginning to incline to the opinion that the real market and people's investment time-frame for real estate changed so radically and became so short because of the creation and expansion of the secondary mortgage market. This happened, not coincidentally, back in the early 2000s, when the rest of the equities market had gone to pot and investors were looking for somewhere to put their money.

Investors got used to the higher returns from REITs and mortgage-oriented hedge funds and demanded more. In order to "juice up" their bundled mortgage bonds, the almost-completely unregulated mortgage industry focused more and more on the subprime and exotic loan market where interest rates are so much higher and returns to investors, at least in theory, should also be much higher.

It's also become clear that even investment vehicles that are supposed to be much safer than high-risk bonds or exotic hedge funds have been "spiked" with bundled-mortgage bond containing sub-prime mortgages. This even extends to many major money market funds.

Flippers, investors and under-qualified buyers took advantage of the much looser credit standards and entered the housing market in droves, thus driving up prices to unsustainable highs.

At some point, the whole thing had to fall apart, and that's what we're seeing.

It seems to me that while the government SAYS it is 'trying to help homeowners keep their homes', that is NOT the purpose here. They are trying to pour oil on the far-ranging troubled economic waters -- of which foreclosures are a trouble visible to and easily grasped by the media and public. Anxious to appear to 'do something'.

There's no point in getting into which mortgage holders deserve help because that's not what this is about.

So...what do you think will help the economy most? Does the best solution even have anything to do with mortgages/foreclosures/building?

(Long-term, I am glad to see higher standards being instituted in the mortgage field, but it is closing the barn door after the brokers have fled with the bonuses, to mix a metaphore.)

chisue: "So...what do you think will help the economy most? Does the best solution even have anything to do with mortgages/foreclosures/building?"

Simply put? Apply the RICO Act to the entire investment community in the same manner in which it has been applied to organized crime.

Until then..nothing will change.

Yes, this market is certainly a good opportunity for qualified buyers.

I am beginning to incline to the opinion that the real market and people's investment time-frame for real estate changed so radically and became so short because of the creation and expansion of the secondary mortgage market. This happened, not coincidentally, back in the early 2000s, when the rest of the equities market had gone to pot and investors were looking for somewhere to put their money.

Investors got used to the higher returns from REITs and mortgage-oriented hedge funds and demanded more. In order to "juice up" their bundled mortgage bonds, the almost-completely unregulated mortgage industry focused more and more on the subprime and exotic loan market where interest rates are so much higher and returns to investors, at least in theory, should also be much higher.

It's also become clear that even investment vehicles that are supposed to be much safer than high-risk bonds or exotic hedge funds have been "spiked" with bundled-mortgage bond containing sub-prime mortgages. This even extends to many major money market funds.

Flippers, investors and under-qualified buyers took advantage of the much looser credit standards and entered the housing market in droves, thus driving up prices to unsustainable highs.

At some point, the whole thing had to fall apart, and that's what we're seeing.