Posted on 12/02/2007 5:14:51 PM PST by shrinkermd
As much as $362 billion in U.S. subprime home mortgages with adjustable interest rates are due to reset at potentially higher rates in the coming year, according to Banc of America Securities, risking a wave of defaults by borrowers unable to afford the new monthly payments. That in turn could exacerbate a wave of write-offs by investors who now own those mortgages. Losses related to bad mortgages already have reached the tens of billions of dollars and have led to turmoil in the world's financial markets.
Fears that the problems could accelerate have led the U.S. Treasury and the mortgage industry to develop a plan that would postpone the higher rates for some borrowers.
The success of the plan, details of which are still under discussion, may hang on the many investors in securities backed by mortgages. A coalition of lenders negotiating with the administration includes investor representatives, but the securities are held world-wide and it would be impossible to get everyone's approval. A deal could also spark lawsuits from investors who believe they're being cheated out of their money.
Unlike in years past, when just a bank and a borrower were involved in a mortgage, today's loans have been bundled together, sliced into securities and sold to investors. That has created problems for officials trying to help borrowers, because so many parties are involved.
Alan Fournier, a fund manager at Pennant Capital Management LLC, Chatham, N.J., predicted that the plan being pushed by the Treasury Department will prolong the pain of the housing slump. He said it would merely delay inevitable foreclosures for some people who can't afford their homes, while allowing holders of mortgage-backed securities to put off marking down their assets
(Excerpt) Read more at online.wsj.com ...
Bottom feeders on society. They should fell the pain not the American taxpayer!
He is correct and the government needs to get out of a market correction.
fell = feel
The investors might have a pretty good lawsuit against any servicers who agree to across-the-board lower rates for the borrowers.
Let the banks fix the problem. They made the loans. They certainly don’t want the houses back. What in hell would they do with them? I am sure they would rather have some monthly’s coming in than a few hundred/thousand empty tract houses sitting out there being vandalized.
Not arguing with you. Just trying to understand what's going on here. Are they talking about lower rates than the homeowners are now paying, or lower rates than what they would otherwise adjust to.
If homeowners can stay in their homes with reasonable rate adjustments is that not a win for both borrower and lender?
Let’s be clear...what is being discussed is unprecidented, in that the legislation would essentially order banks to continue to carry bad debts for up to 2 years, in the belief that will be sufficient time for the borrower to get his act together and refinance to a better rate.
The problem is that even with 2 more years, many of these people who are in default and facing forclosure still won’t qualify for a prime mortgage, and all this does is put off the inevitable and extend the crisis.
Many of these mortgages need to be foreclosed immediately. And many of the lenders who are holding this bad paper, like Washington Mutual specifically, put themselves in this position in the first place, and do not deserve to benefit from their own misconduct.
So investors should be happy getting a negative return because of all the defaults? This is a win-win if someone is actually able to pay off his loan somehow.
I am not sure that Bush is proposing legislation. I think that the Treasury Department is trying to negotiate a deal to stave off bad legislation. If these private parties want to extend the teaser rates and prolong the inevitable, it is their choice. However, legislators are threatening action so I am not sure any deal is an arm’s length transaction. Legislators are having trouble with their strong arm tactics because of the diverse parties involved. This proposed deal will undermine investor confidence in mortgage backed securities. It seems that investors may prefer defaults to prolonged pain.
Somewhere between the low rates that they are now paying and what they will be paying when the rates go up.
you miss the point — the banks don’t own the debt anymore.
On casual review..., possibly. In actuality this whole "bailout" furor merely is a vain attempt to "kick the problem down the road" (hint..., past election time)!
The economic "Piper" WILL be paid, in time!
The government (the Fed) shouldn't get in the way of a growing economy either.
Yes, it will hurt the contruction and retail industries for a longer period in the areas where there’s lots of foreclosures if the banks are required to carry loans from unqualified buyers.
I think that wholesale modifications to existing loan terms are going to face strong resistance from at least some of the people who have invested in securities derived from those loans.
For the folks who own the tranche covering the principal, perhaps, but for the folks who bought the interest based tranches, it certainly isn't a win.
Investors who make more money available for mortgages are bottom feeders?
Most of the plans I've seen floated call for converting the loans to fixed rates at about the original teaser rate, which was below market when offered, and well below market now, and very far below the contract rate to which the loan was to adjust.
If homeowners can stay in their homes with reasonable rate adjustments is that not a win for both borrower and lender?
Perhaps in the old days, when the lenders were lending their own money. Now the loans are aggregated, and the packages split up. You might buy the rights to repayment of the principal. I might buy the interest payments from year 5 to year 10 of the loan. You'd come out ok if the loan was modified; I'd lose. On the other hand, what if we modified the loan so it would pay above market interest, but cut the principal of the loan in half. The payments remain the same, but now you only get half of your money, and I get all of mine. Would that be a win - win for everybody?
The problem is that even with 2 more years, many of these people who are in default and facing forclosure still won’t qualify for a prime mortgage, and all this does is put off the inevitable and extend the crisis.
This particular plan is not based on legislation, but by the Bush administration using the presidential podium to advocate changes by the largest mortgage holders. What he wants is to keep the teaser rates going for a while longer before they adjust, and stagger them out so they don't happen all at the same time. It is a free market solution, but it means that the lenders and bond holders accept that they must accept a lower return on their investments. This is possible if they understand that their return would not be higher if they had to deal with all of the forclosures in the market.
Also, there are other proposals in Congress, by the Democrats, which are intrusions into the market, and will have serious effects. They are proposing changes to forclosure laws which will allow a judge to unilaterally reset the interest rates in court. What kind of business climate would that create?
We also have the serious case of a judge throwing out flrclosure proceedings because the investors could not prove they held the mortgages.
Considering the options, if I were an investor or lender, I would think Bush's initiative is a lot less dangerous than the Democrat/court solutions.
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