Rates frozen for some subprime borrowers

NY Times:

The Bush administration reached an agreement with the mortgage industry on Wednesday on a plan to freeze interest rates for up to five years for a portion of the two million homeowners who bought houses in the last few years with subprime loans.

The plan, hammered out after weeks of talks among Treasury Department officials, mortgage lenders and Wall Street firms, would allow distressed borrowers who are current on their payments to keep their low introductory rates and escape an increase of 30 percent or more in their monthly payments when the rates expire.

Democratic lawmakers and presidential contenders quickly criticized the plan as being too timid and promoted more ambitious proposals of their own.

The agreement, to be formally announced Thursday by President Bush, is expected to contain numerous limitations that would exclude many — if not most — subprime borrowers, according to industry executives who have seen it. It would exclude those who are delinquent on their payments — about 22 percent of all subprime borrowers, according to First American LoanPerformance, an industry research firm.

The plan is also expected to exclude any borrower whose introductory rate expires before Jan. 1. About $57 billion in subprime loans are scheduled to be reset at higher rates in the final three months of this year, according to estimates by First American LoanPerformance.

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The Washington Times reports that some Republicans object to the plan because it bails out borrowers. They are missing the point. This is actually a better deal for the lenders than it is for the borrowers. It allows them to keep the loan as an asset instead of moving it into the non performing loan category which puts it on the road to a write off and ever greater losses for the lender.

If these borrowers were major borrowers, the lenders could have come in an waived certain defaults in order to keep the loans in the performing category. Because they were basically consumer loans, and there were so many, the lenders risked discrimination charges if they waived some and not others. By structuring a deal with the government they hope to avoid that possibility.

This deal has the possibility of being a win win deal for both the borrowers and the lenders, but shhh, don't let the Democrats know lenders are getting any benefit. That may blow the whole deal. Democrats are already whining because the freeze isn't more extensive. I am sure that the lenders would love to turn those loans already in default into performing loans, but my speculation is that regulatory authorities did not want to go that far.

Hillary Clinton is blaming Wall Street for the crisis even though most firms have lost billions because of the non performing loan. She is a former corporate lawyer and should know that lenders do not make money by making bad loans. Obviously most of the big firms have lost billions because of them.

Foreclosure in not a good deal for the lender. It usually results because the underlying security is worth less than the amount owed. If it were worth more, the borrower could just sell the asset and pay off the loan and pocket the difference. Since it is worth less the lender is having to eat the difference. Hillary can't be that ignorant, so I have to assume she is just being a pandering demagogue.