THE TEASER FREEZER: I must be missing something: Bush's people are on the right track?

-

This is sort of surreal. I semi-agree with Bush and Co.

So, right now, The Philadelphia Unemployment Project is trying to organize Countrywide Home Loan borrowers to demand loan modifications such that their introductory interest rate becomes a fixed-rate through the life of the loan. That it’s a modification as opposed to a refinance is important, because then the borrower doesn’t have to get a bunch of new fees loaded onto them.

See, mortgage holders always have the option to modify loans to easier terms any time they want. They seldom do it, but these are exceptional circumstance.

In summary: LOAN MODS NOW!!!

Unbelievably, the Bush Administration seems to be recommending a much more conservative version of the same thing (which is still pretty good). It’s being called a “teaser freezer.” Basically, loan modifications such that the borrower gets another couple of years at the teaser-rate. Not ideal, but a lot better than a rash of foreclosures. The White House is even arguing for the teaser-freezer as something that will benefit investors (we agree, but we’re surprised to hear them say it):

As it stands, loan servicers are being asked – but not mandated – to give extensions of two to five years for subprime mortgages made to borrowers with weak credit that are due to reset at higher rates in the coming years.

The freezes would apply only for borrowers who are current on mortgage payments but unable to afford loans when they adjust to higher interest rates – and sometimes dramatically higher monthly payments. The Federal Deposit Insurance Corp. estimates that 1.1 million borrowers are in that situation.

The FDIC is basically saying the same thing that PUP and its allies have been saying for a while, and one has to believe that the White House has signed-off on this message.

From the same article as above:

“Lenders and investors will ultimately benefit,” Sheila Bair, chairman of the Federal Deposit Insurance Corp., said in an October speech in which she unveiled the idea to investors. “You’ll come out ahead of the game with a performing mortgage that’s being paid versus having a loan that’s in foreclosure.”

In other words: you might like to get that fat return but you ain’t gonna so take the profit that’s available to you instead of losing money. Duh. I can’t believe anyone is still clinging to the notion that those crazy profits might still be realized. I guess they are, though.

Anyway, if you read further in the article it says that some industry folks are realizing that this might save their butts and would be easier than endlessly working through shaky loans on a case-by-case basis.

The outstanding and unfortunate part is this: for loans where the ARM has already kicked in, monthly payments have spiked and borrowers are defaulting, the Administration is not recommending loan mods for them.

Why not? That’s just lost money for the investors, too? Why not go back, write off the part of the payment that is the new interest rate, modify their loans back to the teaser rate (as long as they were keeping up with it) and let them keep going? I don’t see any reason to cut those people off just because they bought in earlier.

The key question in all these cases should be: were they keeping up as long as the rate was fixed? If the answer is yes, give them a loan mod for Heaven’s sake. One of the economist listed says that a lot of people might not be able to keep up with teaser rate, but I disagree. Sure, some people will lose their job or whatever, but in our experience, people are holding on through the teaser-rates. Let them keep them!

The administration also isn’t recommending forcing borrowers to do this with Legislative or Regulatory action. Too bad, but we were already going straight to the lenders anyway, so I think we are in the surreal position of the Bush administration strengthening a case we are trying to make to the private market.

Weird, right?

LOAN MODS NOW! LOAN MODS NOW! LOAN MODS NOW! LOAN MODS NOW! LOAN MODS NOW!