Wednesday, December 5, 2007

White House OKs mortgage rate reset freeze — so what?

The good news? It’s for five years.

The bad news? As preliminary reports indicated the freeze in adjustabale rate mortgage rate resets only applies to homeowners current on their mortgages.

Nor, of course, do we know if ARM –holders who get a five-year grace period will actually learn the discipline it takes to handle a merely delayed, not eliminated, rate reset when it comes down the road.

If not, we’ve just shuffled trouble off to Buffalo, where it will keep growing in the dark.

And, this freeze also assumes lenders will be highly willing to refinance. Well, given what we’ve seen so far, that may not be quite so true.

First, lenders just have not been that anxious to move on this issue.

Second, this may be a situation similar to where people take out six- or seven-year car loans and are, in essence, “upside down” on the vehicle, especially if they want to resell before paying the note off. Something similar may be happening in the case of some houses.

Or, related to that, if a house has lost that much value, investors who bought loans that are now nonperforming would have to agree to eat a loss.

And with slice-and-dice collateralized debt obligations never priced to market, the word “crater” immediately comes to mind in thinking of their potential value in such a situation.

Beyond that, banks and other lending agencies will surely be asking for proof of insurance when a borrower wants to re-fi to a straight-up mortgage. Well, getting back to my early point, what if that ain’t happening, or they ain’t making the grade?

That said, allowing courts more power over renegotiating loans, at least in bankruptcies, would leverage mortgage-buying speculators more.

On the other hand, some economists say that would make lenders more nervous about making loans, which would then make them more pricey.

And, bottom line: people who have paid off loans may not want any sort of bailout that comes out of their wallets.

No word as to whether or not BushCo supports allowing courts more latitude in resetting delinquent mortgages, which is under discussion in the Senate.