Monday, December 10, 2007

Arm Rate Freeze: Smoke and Mirrors?

Last week I went to a Christmas party that featured a Magician. The gentleman was a close up illusionist. I was in the front row and was determined not to be tricked by his sleight of hand... not a chance. This guy was so good I didn't have a prayer. I thought I was following his every move but he was misdirecting my attention the entire time. It's one thing to see a little misdirection at a show that is supposed to be entertaining.. it's quite another to have the government try to pass it off as a solution to a serious problem.

Much has been written about the arm freeze to help homeowners who may go into foreclosure if their payments increase because of loan resets. The problem is that like the magic of a Master of Illusion.. I'm afraid our attention is being misdirected from the real problem.... Wall Street investors who continually demand removal of regulations that hamper their concept of business and profit.

Brian Brady when asked about who benefits from the rate freeze was very candid.. the program is more about saving lenders then homeowners. Some will say that by saving lenders from their stupidity we end up saving the economy and Harry and Susie Homeowner. I agree there is some truth to that theory but ultimately I don't think that's what will happen. Rather by saving lenders from facing their mistakes they just go on to make other equally poor choices because they know they will never be held responsible for their errors of judgment.

In the 1980's the Federal Government bailed out the Savings and Loans from their disastrous financial errors that began with commercial lending and eventually found their way into the residential market with the recession of the 90's. That bailout cost the American taxpayer Billions with a capital B. Deregulation along with the machinations of Michael Milken, the junk bond king, and his cohorts helped bring the economy to its knees. The cost was far in excess of the figure the government had calculated. The banks were saved but lessons were not learned by the banks or the Federal government. I suspect the same will happen with this fiasco.

The Arm Freeze basics:

** The home is owner occupied
** You have a job
** Loan was originated between 1/1/05 and 7/31/07
** Your payments are current
** Your FICO score is under 660*
** The loan will reset between 1/1/08 and 7/31/10
** The value of the home is more than the mortgage amount
** If the loan resets you may default as you can't afford the higher payment.

** The program is voluntary not mandatory for lending institutions

If you read the basics of the program a few things stand out...... First it's a voluntary program not a mandated one for all lenders...... Second if you are already in trouble there will be no help. Third.... and this is the big one.. Your home can't be upside down in value.. that is.. it must be worth more then the mortgage amount.

Now I don't have an MBA in finance.. so maybe I'm missing something here.. but if home prices are falling in most major metro areas then just how many people can the voluntary program cover. My guess is not many... certainly a whole lot less then the numbers coming out of the administration. Supposedly there are 2 million foreclosures that have or will hit the market shortly. Projections about who the program will help depend on who is doing the talking. The administration says 1.5 million homeowners will be saved from foreclosure. The Center for Responsible Lending says maybe 145,00. I 'm more inclined to go with the low number.

The bottom line is about home values. If the home is worth more then the mortgage owed.. that is... there is equity... why wouldn't a homeowner refinance at a lower rate for a long fixed period. Or if the owner is really in trouble and the home has equity why not get out from under and sell the house. This is the course most people would take if they could. They don't because they can't. Prices have fallen in so many areas that most of those in trouble owe more then the market value of their home.... hence all the short sales and REO's.

There is another little glitch that isn't receiving a lot of attention. How many investors are going to go for changes in the return of investments they bought. These guys bought into funds based on a given return and they are not going to be happy with a lesser return then promised. If properties go into foreclosure that is a risk they take.. but having the government change the rules mid-stream may not go over too well.

Like everyone involved in the housing industry I'll be keeping an eye on the program.. but the truth is I don't see it actually getting off the ground or really helping anyone. The country would be better served by instituting enforceable regulations concerning lending practices and really going after those who profited from what is out and out fraud. Until the banking industry has to face up to the consequences of their actions we can continue to expect to see new little schemes in the future. If Congress and the administration really want to do something to deter future problems in the financial sector they need to make those responsible pay a very heavy price. Until there is a serious consequence to the shenanigans on Wall Street we will continue to be misdirected by illusions of grandeur.

Help for California Subprime Borrowers... Maybe?

Foreclosure: You Can't Always Walk Away

Beach Cities: So Where Are the Foreclosures?

Southern California Home Prices:
Are We really in Trouble?

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