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.