The proposed ARM rate freeze

The feds are proposing that mortgage brokers freeze rates on adjustable mortgages that are about to reset. Sounds like a politically popular idea, but will it work? And who benefits?

The banks may lower some rates or prevent ARM rates to increase as much as they would normally do, but they will try to put the difference into the principal sum owned, or have the taxpayer pay for it.

In other words, this would primarily be an investment bank bailout, as they bought and sold trillions of dollars worth of mortgage-backed securities, more than a few of which now are near worthless.

Also, the mortgage companies may not even own the mortgages, which were sliced and diced, packaged into bonds, then sold. Only the owner of the mortgage can ok freezing the rates.

These [owners] are not the criminals that made the deals. These are pension fund and entities like the Florida Local Government Investment Pool, school districts and the like, which are in deep trouble. Should and can they be made to give up their trust money to save house speculators?

It’s not just Florida who invested in SIVs.

Among the places caught up in the SIV and subprime snarls are Connecticut, Florida, Maine, Montana and King County, Washington. Public funds hold $1 billion of defaulted asset- backed commercial paper, including $273.5 million from SIVs.

Montana entrusted $465 million, or 19 percent of its $2.5 billion investment pool, to SIVs.

These SIVs were investment grade rated when the funds bought them because, in a truly sickening move, the regs were changed a while back so that a debt security received the rating of the company that insured it. If a bond insurer is AAA rated, then everything it insures is too. What a cozy arrangement for those selling garbage debt.

But the reverse is also true, and that portends serious trouble. If an insurer loses its AAA rating, then everything it insures does too. This would led to a paroxysm of selling because, among other things, pension funds are not allowed to hold debt rated as less than investment quality. They would be forced to sell. If they can, that is. Much of this toxic junk has no bid, thus with no buyers at any price.

  • It will be a bailout for sure; the banks aren’t going to lose money. The FBI has come out and said that up to 70 percent of early payment defaults may be linked to borrower misrepresentations on mortgage loan applications, according to the FBI’s Mortgage Fraud Report. We are going to bailout folks who used “borrower misrepresentations” to get mortgages that later defaulted. Most of these people are not innocent family people. They were complicit in defrauding the lender to get a loan they couldn’t afford — and now we are going to bail them out. How long can we make such crazy decisions before the numbers don’t add up and our system goes kaput?

  • DJ

    The system encourages misrepresentation. I’ve seen many times that when someone applies for a no-doc mortgage, if their numbers aren’t quite high enough, the loan officer will suggest that the prospective borrower “recalculate”– i.e. fudge.

    To suggest that 70% of the millions of Americans facing default are criminals as a result of participating in a system that encourages you to lie in order to get a loan seems to me a bit absurd. Even if they were, where would we build all the prisons to hold them?

    BTW, I read in one article that 100% of those facing default failed to consult a loan counselor before obtaining their loan. I for one have never heard of a loan counselor before (and I’m a property owner and former realtor), so I’m not surprised. The mortgage industry certainly doesn’t advertise their existence.

  • Yes, the system encourages people to lie. Unscrupulous mortgage brokers encourage their clients to lie every day. However, the borrower is still the one who tells the lies, the one who signs off on the legal documents. Our morals are really getting murky. If we shrug our shoulders to mortgage fraud, where is society heading? As long as telling falsehoods is “part of the system,” we’re off the hook? That’s like telling your teacher that the reason you cheated on the test is because “everyone cheats.” The teacher would still give the student a big, fat zero. We should expect adults to live up to the same moral standards that we expect from our children. If you tell a fib, take your lumps. I’m not up for bailing out liars just because “everyone else” was doing it.

  • DJ

    Actually I think it’s more like the teacher encouraging you to cheat– and no one gets hurt until the proficiency test. Or like leaving your bicycle on the sidewalk without a lock, or leaving your car running outside the grocery store: it’s an invitation to steal, and a person would be foolish to expect otherwise (except perhaps in a small, rural community). “This is what you have to say for me to give you a loan (wink, wink).” More people than not are going to say what the loan officer wants to hear.

    Is it right? No. But the no-doc loan is much like the verbal contract– taking the borrower’s word for it. Those who get burned can’t say they didn’t know. I say this as one who prefers doing business with verbal contracts– and knows full well that much of the business world may take advantage.

    The appropriate response, in my view, would be to eliminate no-doc mortgages entirely. You can’t even get a driver’s license without verifying your identity and social security number– why would anyone loan money to a borrower with limited history, without verifying that what they says is true? Especially when neither side of the transaction is a disinterested party: the loan officer gets paid (or at least rated) by how many loans are made, and doesn’t personally take any risk for them.

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