Freeze Interest Rates? From Bankruptcy to Profit?

By
Real Estate Broker/Owner with Northern Virginia Homes - FRANKLY REAL ESTATE Inc

On the heels of our discussion about legislation to remove the Phantom Tax associated with short sales, (see my quote in the Washington post on Short Sale) there is also legislation out there to freeze Adjustable Rate Mortgages for homeowners. 

I have the following questions, maybe you know the answers:

1) Will it only help those facing foreclosure, or will everyone that locked into a 2% teaser rate get the benefit of a 4-8% reduced rate. On a $300k house, this comes to up to $24,000 in savings per year!

2) Who pays for this? The banks already have calculated expected earnings based on the rate jumps. Do we expect the banks to just eat it? Or does the government write the banks a check?

3) If a $300,000 house increases in value to $400,000 in 4 years, after the government gave some a $96,000 bailout, will they be allowed to take that $100,000 profit?

What I MIGHT be able to understand is a Minimum Payment Option, but the unpaid balance be paid at the end, when the house is sold (like a minimum payment on an Option Arm).

My understanding of the proposed solution:

  1. 2005 purchaser pays $300,000 for a home. 100% loan. 4% rate, that adjusts to 7% in 2007.
  2. 2007, the government (or the bank) covers for the 3% difference ($9,000 a year)
  3. 2010, if the seller can sell for $330,000, after 3 years of government subsidies totaling $27,000, they PROFIT $30,000
My proposal:
  1. 2005 purchaser pays $300,000 for a home. 100% loan. 4% rate, that adjusts to 7% in 2007.
  2. 2007, the government (or the bank) covers for the 3% difference ($9,000 a year)
  3. 2010, if the seller can sell for $330,000, after 3 years of government subsidies totaling $27,000, the payback the subsidy for a PROFIT of only $3,000

BOTTOM LINE: While a measure like this might help distressed homeowners, I can see many situations where this might result in a near bankrupt homeowner suddenly PROFITING $30,000 from taking out a risky loan.

- Written by Frank Borges LL0SA- Broker FranklyRealty.com 

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Rainmaker
1,147,431
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time
Very interesting Frank. This rate freezing proposal has so many negative scenarios attached to it it is mindboggling. I had not thought of this one before. A valid concern for sure.
Dec 07, 2007 09:23 AM #1
Rainmaker
123,517
Rebecca Savitski
BSR Real Estate Group - Cary, NC
NC Real Estate Listings
I can't see this rate freezing flying, and I do agree that any subsidies need to be paid back if there is equity in the home within a certain time period. I smell another scam.
Dec 07, 2007 02:52 PM #2
Rainmaker
129,659
Kevin McGrath
Long & Foster Real Estate Companies- Fredericksburg/Spotsylvania - Fredericksburg, VA
Long & Foster Real Estate Companies

I'm sorry, I still am not smart enough to understand this program. You have to be current on your mortgage, but have a score under 660? And if their rate is frozen for 5 years, their payment stays the same. But if they have by chance maxed out all of their other credit scores in order to get their score low enough, and if they are on a fixed income, as most Americans are, and the cost of living keeps going up, it seems like a pretty short term fix. How long until gas is $4 a gallon, and commute times double due to the roads becoming more and more clogged? And don't forget, they probably can not refi due to the slip in the market, so no financial net there. Can they even refi if they are in this program? 

Sorry Frank - I don't mean to hijack your blog. I just don't get it.

Dec 08, 2007 12:01 AM #3
Anonymous
Kim@expertappraising.com

This link suggests the freeze would aim to only help a few people and the government would not be involved.  I don't think there is going to be any "free money" for anyone...

 http://www.breitbart.com/article.php?id=D8TC48RG0&show_article=1

Dec 08, 2007 06:06 AM #4
Rainmaker
138,455
FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com
Northern Virginia Homes - FRANKLY REAL ESTATE Inc - Arlington, VA
Dec 08, 2007 06:38 AM #5
Rainmaker
826,196
Fran Gaspari
Patriot Land Transfer, Inc. - Limerick, PA
"The Title Man" - Title Insurance - PA & NJ

Frank,

I share your concern...the fed 'monkeying' with rates is scary...and are these mortgages assumable!!! Thanks,   Fran

Dec 09, 2007 08:45 AM #6
Rainmaker
121,655
Vickie Arcuri
ONE Sotheby's International Realty - Fort Lauderdale, FL
South Florida Luxury Real Estate
Hi Frank, thanks for the post!  It will be interesting to see how this all works out.  So many things to consider!
Dec 09, 2007 02:59 PM #7
Rainmaker
138,455
FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com
Northern Virginia Homes - FRANKLY REAL ESTATE Inc - Arlington, VA

Hey Fran,

Funny, assumable frozen mortgages?? Brillian question.

Dec 10, 2007 03:31 AM #8
Rainer
750
Tom McCammon - Commercial Lender MainStreet Bank
MainStreet Bank - Herndon, VA

I would like to see some belts and braces put on this program to ensure that those that truly need assitance get the help the need and those that deserve to lie (lay?) in the bed they made do so. Specifically, any borrower seeking relief under this program should be asked to substantiate all information furnished by them to the lender in connection with the loan application and underwriting process. If any information can not be substantiated, the borrower should be disqualified for relief. If any information is found out to be fraudulent, the borrower should not only be disqualified, but also face criminal/civil penalites for defrauding the bank.

 

Dec 11, 2007 02:34 AM #9
Rainer
1,278
Christopher Burgess
Sterling, VA

I did a post today about t-shirts as commentary on the market.  One of the t-shirts I saw said, "I planned within my means and got a fixed rate mortgage...where's my bailout??"  The media isn't picking it up yet, but as details of this plan are fleshed out and announced, I think you're going to hear a lot more of that sentiment.

 For the record, I didn't buy the last couple of years because home prices and the loans needed to get into them didn't make sense.  Maybe I shouldn't have cared so I could have gotten my bailout, too.

 You can see some of the other shirt designs I found in my blog, Foundation

Dec 11, 2007 07:46 AM #10
Rainer
80,702
Jeffrey Dolfinger
24/7 Realty Inc. - Poughkeepsie, NY
NRBA Member

Assumable where did it say assumable did i miss something?  anyhow the plan fixes little and just slows the foreclosure market in an effort to assist the consumer confidence and boost the dollar.  It has little to do with helping homeowners if you look at the big picture.

Dec 11, 2007 01:42 PM #11
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Rainmaker
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FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com

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