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The plan to freeze "teaser rates" on subprime mortgages due to reset to higher rates within the next two years is a complicated one that won't help everyone. Here are some key questions and answers, with many details yet to be worked out.
Q: What's the gist of the plan?
A: It's a private sector plan brokered by the government that aims to prevent a wave of expected foreclosures. It would do that by allowing troubled homeowners facing interest rate hikes in the form of resets in the next two years to keep their lower introductory, or "teaser," rates for up to five more years. The rate freeze plan would apply to mortgage borrowers with loans taken out between the start of 2005 and July 30 of this year, and with rates scheduled to rise between Jan. 1, 2008 and July 31, 2010. Anyone whose rate has already reset is stuck with the higher payment.
Q: Are there conditions?
A: Absolutely. Lenders and mortgage servicers get a lot of discretion to decide who's in and who's out. And remember, the whole thing is voluntary for both sides (in fact, 16% of lenders aren't participating at all). To begin with, anyone already in arrears by more than a month is ineligible. Others will qualify only if lenders and mortgage servicers determine both that they can continue to pay current rates and that they cannot pay the reset rates. Homeowners now in the foreclosure process or those who have already refinanced are also ineligible. Only homes occupied by owners are eligible.
Q: How many will it help?
A: Estimates vary widely, and it'll take a while to really know. The Bush administration says that as many as 1.2 million of the 1.8 million facing rate resets over the next two years will be eligible to apply. Probably far fewer will qualify -- perhaps only a couple of hundred thousand.
Q: Is this a bailout? What will it cost the taxpayer?
A: That depends on what you mean by "bailout." Let's leave that to the politicians to debate and just say that the government won't put any money into this. Although the Treasury Department is spearheading the effort, private industry groups -- from lenders to Wall Street firms -- are footing the bill, largely because it's in their interest to do so. The cost of renegotiating loan terms, for example, is less than the cost associated with a foreclosure.
Q: So who will pay the tab?
A: Investors, for starters. Those holding complex mortgage-related securities will get a smaller return because the freeze lowers expected monthly payments. These investors range from mutual funds to pension funds to overseas hedge funds. That won't sit well with many of them, meaning that shareholder lawsuits are likely to emerge. Treasury Secretary Henry Paulson describes the litigation risk as "manageable."
Q: Why is the government doing this?
A: Two main reasons. The first is an economic one. The administration and many others worry that the mortgage mess will hurt the economy. They want to do "just enough" to keep huge numbers of homeowners from foreclosure, short-circuiting a bigger crisis. Still, everyone involved realizes that this plan is no silver bullet. Many think it's the first of several steps that will be necessary. In addition, no one is sure it will do much to alleviate the credit crunch or boost consumer confidence and spending. But it's not insignificant, either.
The second reason is political. Elected officials want to help and to be seen helping. They hope this plan does that. The administration and other Republicans also hope it will keep Democrats from taking more radical action that will involve a much greater government role. But some Republicans -- both officeholders and rank-and-file voters -- are already upset that it goes too far. And many Democrats say much more is needed.
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POSTED BY: Robert (December 15, 2007 12:35 AM)
I agree that people who had no hope of ever affording the home they initially bought will have to simply become renters again. Many are losing nothing anyway, since they put nothing down on the house. However, there are many owners who financed with subprime loans that could afford their homes if the loan terms were simply more reasonable. Say the teaser rate was 6.5% jumping to 12% or more after 2 years, as is typical. Well, 12% quite frankly is a ridiculous rate to charge on a mortgage. yes, these people were stupid but alot were unsophistacted and alot were misled into these awful loans (that really should have been illegal to make in the first place) and would have qualified for FHA loans (at least the ones who put down 3% or more). I don't think letting them lose their homes is the proper answer either. There should be a middle ground--for example, many could afford say 8%--why not reset the loan at that rate? It's alot better than 12-14% and it still gives the lender an additional yield over a prime loan to cover the added risk.
But in any event, this problem has gotten so big and has the potential to cause such dire consequences for neighborhoods, especially inner city ones, that something has to be done. Just like Chrysler was bailed out 25 years ago because of its importance to the economy, there are simply too many of these homeowners to allow them all to have their homes go into foreclosure. It's the "too big to fail" syndrome. So whether it is right or is it just?, it doesn't really matter. It is right to do something because the consequences for the country if nothing is done is so dire.
POSTED BY: Dysfucntional System (December 15, 2007 10:00 PM)
Too many loopholes, too many thieves, too many lies, too many inorganic dollars, too few with all the money, too little power to the people, too many conspiracies. Our financial system is doomed to fail because it's rigged to benefit the few. How could you have a private bank called the federal reserve creating money out of thin air which produces artificial inflation, playing with interest rates to create boom/bust cycles that wreck havoc to the lives of far too many americans? YOU WORK TO RETIRE, AND THEY KILL THE DOLLAR. Why are the major brokers going around freely, unchecked, doing what they call financial engeneering, creating financial vehicles to squeeze the life out of you; in what school are they teaching thoses thieves ways to strangle the american families through the creation of deceptive financial vehicles that when the unexpecting and trusting citizens wake up they realize that what they've done to them is sinful, abusive and shameful. Yes why is wall st giving themselves this year record breaking bonuses something to the tune of 38 billion while security shareholders are losing 74 billion.
The system is doomed to fail too late to fix it in my opinion. Get ready for a new type of currency this is a global problem.
POSTED BY: Malpas (December 16, 2007 09:39 AM)
Wow....Glendora, you sound like what most people call a "HATER." You sound angry because other people were trying to better themselves and live the american dream (Home Owners) and because you couldn't do the same, you're actually happy because these people could possibly lose their homes and become homeless just like you and your wife. Everyone deserves a second chance.
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