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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:

Homeowners:
** 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.

Lenders:
** 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?

Posted by Manhattan Beach CA/ e-PRO..... Kaye Thomas... on 12/11/2007 10:55 AM

Comments (37)

real estate, foreclosure, arm freeze

This post has been included in California Information Los Angeles County, CA Information Manhattan Beach, CA Information

37 Comments on Arm Rate Freeze: Smoke and Mirrors?

DEC

2007

Kaye

Now this is a stellar post.

Kaye - You raise some very valid points. This is just a little band-aid when a tourniquet is needed. The perameters may assist a small handful of folks and it isn't mandatory. It may help a few, but there are so many more that will slip through the cracks. At least a few will be helped, huh?

Yep, It is a stellar post. I don't see the "bail out" as anything more than smoke and mirrors either.

Ed- Thank you.. I value your opinion

Marlene-Sadly I don't think there is much we can do to help this patient..

Debbie-Thank you for visiting.. seems to me the bail out is more about publicity then helping the public

Kaye, I don't think it's fair to blame the investors. Without them buying mortgages, there wouldn't be a sufficient supply of mortgage money. The other side of the coin is that investors need to accept the risk inherent in buying risky loans.

I'm not a fan of government bailouts, because they remove the market forces that would otherwise keep investors more cautious of making rash investments.

In Washington, it is always smoke and mirrors and worse! No wonder the American people have a lower opinion of people in government in general that they do a used car salesman, attorney or a Real Estate Agent (lol)!

The problem is that the public is buying this hook, line, and sinker. The good part is that since perspective is more important than reality we may actually see some market improvement.

I agree with Bill. The politicians are just doing this to make the public think they are taking action, and the public is falling for it. To qualify for the rate freexe, you have to be CURRENT on your mortgage payments and PROVE that your rate going up will be a financial hardship. It is going to help so few people it is a waste of our tax dollars as usual.

Smoke and mirrors eh?. Anything to do with government has to have lots of smoke. They coming to the "rescue". But at what cost to us the taxpayer. That's where the mirror scenario comes in.

Kaye.... awesome job in the explanation.... this is what we need to see more of. Not supplying blogs with these programs, but awareness and reality.

Kaye, with very few exceptions, if any, folks in my area that are having problems are upside down on the mortgage. Values are down a good $25 to 30% from their high in late 2005. NONE would qualify.

Hi Kaye, The proposed fix ( fixes as there are several of these in the states as well) is more a knee jerk reaction to an issue that we have never seen before. When the money was cheap, we saw people react and take advantage ( just like they were encouraged to do). I like most probably passed a bit of moral judgment but it is really no different than what people when tempted to do with other kinds of business deals ( including investment deals) that were not necessarily illegal but were definitely in a grey area.

I find it remarkable that there are so many that seized these opportunities that seemingly looked like a way out of their quagmire ( at least as far as housing is concerned and may be even to create a little bit of their own wealth).

Perhaps the bigger issue that is overlooked is Why a nation with our wealth and creativeness had housing issues ( lack of affordable housing )like this that tempted so many in the first place.

Legislatures nationally and in the states regulate everything but air ( that may change as soon as they figure out a way to to do it) and in the process create opportunities for some and curtail opportunities for others. Since money rules all, the opportunities would seem plentiful for those that have it. For the others, they are not going to ever get it anyway, at least until some pushed that door open way to far.

I am not in favor of socialized solutions as are being cast about by many on the left. I am also not in favor of just ignoring the problems of need as might be said of those on the right. Somewhere in the middle are possible answers but with the polarization of the last decade and a half, I can see why when the door opened a little that the squeeze to rush through pushed it open to far.

The best solution to any problem is not having one in the first place but when the gains that created so much wealth was observed and the door was ajar, little wonder how all this happened. Some call it greed, yet those that were successful were not called greedy, they were called smart and were welcomed with open arms to spend the new found wealth. At the other end of the spectrum we see the entrapment that those that were not fully equipped to handle, are getting the wrath , including those that provided the door stop to hold the door open wide enough to lure them.

No easy answers and politicians are making their own hay while the sun shines focused on them to fix the problem. What these people failed to fix was the original issue of a desire for a home that had been denied during more normal markets and when the feeding frenzy was creating wealth, they naturally thought it meant there was a chance for them too. Wrong on both counts.

The Federal government with taxpayers money can use it to build bridges to nowhere, research on the breading cycles of nats and the varied other grants that seem useless. There is no question in my mind that there could be a way to end homelessness, to end poverty or at least to curtail the misery index by a lot if there was just some way to make all these issues exciting enough to be priorities.

I am not an advocate for societal repair programs but there certainly are a lot already. At least as far as the subprime fixes proposed, they seem more stupid than enterprising. But given the American people's view that this is now a government problem, there is not now and will never be a solution until the original problem is considered. Imposing new rules for keeping the horse in the barn after the barns are all torn down does seem a waste of time. But as they say, the law will be in place just in case someone builds that new barn.

Your post is excellent and I am in total agreement with your appraisal of the issue and the likely outcome. Great job and certainly warrants being featured. Well done Kaye! Congratulations.

Kaye - I am in awe of such a well written post. In my own little world I think I'm pretty good at what I do, But reading other peoples post the last month, and finding those who really know what their talking about and are able to articulate it so well in a post has been an incredible experience for me. Well there is little we can do with the information you shared, I agree with what you have expounded on and I only hope those who vote will remember in November smaller government is always better.

I may be misinformed but the loan loss mitigation plan for a rate freeze requires a 97% LTV or higher. If the LTV is lower than 97%, borrower may be able to refinance. If it's 97% or higher and the borrower is current, the rate can be frozen at the discretion of the lender. This is just a proactive approach to get borrowers to contact their lenders and look at all possible solutions. I know if it was my money being lent on a home that has no equity in it, I'd freeze the rate and take what I can get. Lenders don't want the house, just the monthly % paid on time.

This is an excellent and well written post Kaye. It is clear, concise and well thought out. Thanks for the post and the information.

Great post and well put information. I have read many posts and have posted a couple myself and it is always interesting to see the word get out there in many different ways and approaches. Glad you got a feature on your post and glad to see the information and still getting out to the public. We all need to know what exactly is going on and see that the plans are really not helping that many.

Most people in my area and that I have met will not be included in getting help with this plan or the other one for FHAsecure either. But yet the politicans make it "sound" like they are helping. And then we go right out and vote for them!!!!!!!!!!!

Makes perfect sense, of course. I wonder how long it will take the public to realize they've been watching a "magic" show.

Sure does leave a lot to be desired, doesn't it.
As more details come out, it is very revealing about who will be helped.

Excellent post Kaye. I don't have an MBA either but I'm old enough to remember the 80's and 90's. History always repeats itself. Unfortunately America has a short memory with no regard to history.

Wow- Thank you all for comments. I apologize for not responding sooner but it has been a busy real estate day..

Brian-I'm not blaming individual investors.. but rather a group think that demands higher yields without much thought about risk. These funds are risky and investors should be ready to accept responsibility for the profit or the loss...but they don't. At the first sign of trouble the immediate reaction is a government bailout so they won't lose too much money. It's like playing Black Jack in Vegas and demanding the house pay you back if you lose a hand.

Bill- LOL..It's nice to know the public views someone as less trustworthy then their local REALTOR... You are right.. the public does buy into the whole deal and yes if people feel the government is taking charge they may feel more [positive about the market..

Ann-You are right on all points.. At this point it seems to be a case of much ado about nothing

Robert- I think this is what makes me so mad.. it's always the taxpayer who bails out these clowns..They have no problem taking the profits so they should have no problem taking the loss.. It's not my responsibility to bail them out

Jeff- Thank you for your kind words...

It is nothing more that election year headlines, your right smoke and mirrors, and just think Clinton said he did not inhale, maybe, but it sure looks like Bush smoked out like a Jamaican.

Take care!

RJH

BB-I know your area has been severely hit by the subprime problem.. This is one of those pockets who should have been on the radar for a little help but as you note.. with the loss in home values no one will qualify. I find the mortgage to value criteria to be the most cynical of all the criteria of the supposed freeze.

William- You have covered many of the issues I find troublesome..You are correct that when you win you are smart but if you lose you are greedy.. I'm also not in favor of governmental solutions to problems but I do believe that government should be responsible for regulating areas that are of public concern.. housing, utilites and some energy programs come to mind. This administration has pandered to it's friends and lost a lot of credibility with the public on issues that affect their everyday concerns.

John- Gosh... I'm blushing from your praise..Thank you.. That said.. I think AR has some of the sharpest minds in real estate within our community.. I always learn so much from everyone here. AR represents a wide cross section of the country that knows what is happening in local neighborhoods. This may be why so many have written on this topic.

David- Now that's interesting considering what the requirements state.. The problem is that you are talking about individual investors rather the a group of investors who may not own the whole loan but only part of a package of loans.. This is where it can get very tricky from what I've been reading.. Common sense would tend to agree with you.. too bad we haven't seen much of that lately.

Craig- Thank you ... Want to be my new best friend?

Rosemary- Thank you.. We do need to know what is going on.. my area is too high priced for FHA or other government programs..

Lenn- I suspect the rumblings are not too far off.. I'm guessing about the time someone tracks the record of the arm freeze by lenders and finds that only 50 people qualify for the program..

Diane-Yep! Check out my reply to Lenn above.. My guess is that the numbers are going to be extremely low.. I figure the fur should start to fly in about 4 months..

Mitchell- Don't you find it interesting that it's mainly those of us who have been here before who question this whole program. I had a teacher who said that history should teach us about our mistakes but that we rarely choose to learn the lesson.

Robert- I agree this is more about the coming election then homeowners who are about to be evicted from their homes. I've always suspected that politics had more in common with heavy drug usage then reality.. otherwise how could these people say the things they do and expect to be believed

Kaye-I'm going to keep this short. I think the proposed freeze isn't worth the paper it is written on. The restrictions are to arbitrary and the selection of the time frame makes no sense. Many of those who are in trouble in our area are upside down and this plan is not going to help. I wish I was more optimistic but I think it is ill conceived.

Cindy- I agree 100%.. it's an election year ploy.. I just hope people see throught it

DEC

2007

Hi Kaye, That is probably correct as far as the credibility issue goes, no doubt. But the problem runs deeper than the administration, it is both sides of congress that is failing in the solution dept. And it may well be because the problem has never quite existed in proportions like this. I honestly do not feel they are very well equipped to deal with the many aspects of the issue.

I wish I had an answer that was so profound that following it through would eliminate the problem but again, it is not within my experience or intellect to come up with it.

Should then we even try? I suppose so but it must also be understood that it will not be one solution or one side that wins the day. More likely a blending of many small parts from all the participants and with a prayer and a lot of luck, we actually may get to the other side of the problem. The casualties though will be many and winners will be few.

Kaye,

I know they are trying to to help but still don't see much of an effect on the market for the better. I think the inventory is smothering us and there are still consumers that can't buy or are scared to so I'm not sure the real solution has been found.

William-I hate to say this as I know there are many places that are in serious trouble but I don't think you can solve the problem other then to let it run its course and be over..Most of those in trouble barely qualified with a teaser rate.. the truth is that they should never have bought a house as they didn't have the financial resources needed for homeownership. What happens when the roof needs replacing or a sewer line goes out..

You can't solve this problem but you can stop it from happening in the future. The question is whether the FEDS will do what is necessary.. I ten dto think not.

Neal-I don't think this is the solution and doubt there is a solution other then letting the market resolve the mess. Unless the financial community truly comes up with new products.. I heard of a program that is a 40 yr loan that is fixed for 15 then adjusts to the market rate.. might be a start. The problem is that most investors don't want their money out that long but want a shorter return.. Who knows if I was that smart I'd be playing golf everyday..

The worst part of this whole deal is the people complaining that they don't qualify because they can make their pmts ontime. They want something for free too....

*sigh*

Tom- I guarantee you that before this is over it will be packed with people who used a little fraud to get their payments frozen.. Think about it.. how mad should you be if you are making your payments and will have a hefty rise in your payment while the guy next door gets a break and takes a trip to Europe with his extra cash.. It's going to be nasty..

DEC

2007

Kaye, I agree with your comment to me. That's basically what I was trying to say -

Brian- Thanks.. I thought we were on the same page.. just saying it a little differently..

DEC

2007

Cindy- I agree 100%.. it's an election year ploy.. I also agree with this, nothing more.

David- I've been noticing that the euphoria after the first announcement is evaporating as people begin to understand the program is not aimed at helping a large group of folks.

DEC

2007

Great post Kaye! You highlight some sad but true facts about what's going on and it all boils down to greed and not much if any oversight of the process.

Hopefully we can learn from this situation. There's accountability on all levels here and sadly it's the banks that are truly getting the bailout.....not the homeowners.

Ana- Thank you.. the truth is..as you point out.. none of this is about homeowners... it is all about bailing out the financial markets. If the financial markets were not having problems you can bet they would let the owners go into foreclosure without skipping a beat..

MAR

2008

How true! I like the way you state your position and the analogy. We are deceptively being deceived in the name of profit for some entity.

My thoughts is that is not the bad part, the part in my mind is that we allow it and don't feel people's behavior need to be help accountable for their bad behavior that exploit others.

We have become such a dumbed-down society and completely but into the Wal-Mart mentality being served up by unscrupulous operators.

FANP- Ahhh. there is always more then meets the eye when dealing with the goernment

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