First off, the mortgage rate freeze plan is voluntary. Thus, there will be no contract abrogation. The mortgage issuer probably no longer owns the mortgage, as it has been tossed into a CDO and sold off in tranches. For example, a Countrywide mortgage that Fred in Boston got may be residing in a CDO issued by an investment bank with his tranche owned by a US pension fund or a Scottish bank, or whoever. Thus, the owner of that tranche needs to ok any rate change.
Also the plan only applies to a small subset of those with mortgage problems, about 7% or so. So, it’s difficult to see how this will help many people.
My take: It’s for political show. The government needs to be seen as doing something.
Tanta at Calculated Risk has an exhaustive analysis, concluding with –
The authors of this plan believe it is liability-proof (that it basically meets the requirements of the existing PSAs, with the caveat that it isn’t a legally binding mandate on all servicers and securities, so a deal with a very restrictive PSA that this isn’t compatible with can just opt out.
Is it all kind of anemic after all the build-up? Yep. Does it mean contracts are now invalidated in the U.S.? Not as far as I can see; in fact, I’d say the contracts were the part of this that got the most thorough protection. In my reading of this, giving a deal to a borrower almost seems incidental.
There are no protections for homeowners or potential homeowners, as everything caters to lending institutions.
Some people are upset about “bailing out” borrowers who overextended. I wonder about bailing out the lenders who pushed crap loans on the borrowers to begin with. NPR pointed out today that most borrowers see their loan officer as an expert from whom they expect professional advice.
This is much like, say, a tax accountant. If a tax accountant gives ridiculously bad advice, the taxpayers would still owe any tax they tried to avoid, but penalties would be waived because they relied on (flawed) expert advice. In some circumstances, the accountant can be fined, charged with criminal conduct, kicked out of his/her professional association or (as happened to one accountant from whom I’ve inherited several clients) barred from practice for life. Everyone recognizes that if the professional gives bad advice, the client is not to blame.
In the case of a mortgage, there’s no doubt the borrower owes the principle, which is secured by his/her property. But there’s certainly a precedent for not penalizing the individual who relied on bad professional advice. More and more, I think loss of interest income ought to be born by the lenders– those “professionals” who pushed the subprime loans in the first place– and to whom the buyers of their repackaged bond products will now be looking.
It’s also not clear if the homeowner will owe the frozen amount or not once the freeze expires, something which probably depends upon the precise wording of the PSA.
If a maximum of 7% can benefit from the plan, and it’s voluntary, then I’m guessing far less than 7% will actually get a freeze.
There was so much greed and deception from all sides here… But yes, some homeowners really got shafted because they trusted snakes.
BTW, NPR reported yesterday that 12-18% of sub-prime borrowers may benefit.