Freezing Mortgage Rates Will Fail

In a misguided attempt to revive housing California lenders agree to freeze rates.

In an unprecedented move designed to save thousands of California homeowners from foreclosure, Gov. Arnold Schwarzenegger announced a deal Tuesday with four mortgage lenders to freeze adjustable interest rates for some of the state's highest-risk borrowers.

The deal brokered by Schwarzenegger requires lenders to freeze low interest rates for subprime homeowners who reside in their property.

"To lose your home, as probably everyone knows, through a foreclosure is an emotional crash and it sometimes takes years to recuperate from," Schwarzenegger said. "But we don't have to sit idly by to watch the American Dream become the American Nightmare."

For starters the very best thing that could happen to most of those stuck in mortgages they cannot afford would be to lose their home. The American nightmare is not losing one's home but rather being a debt slave on one's house, owing more on it than it is worth for an eternity.

Where are all the affordable housing advocates anyway? The more foreclosures there are, the more affordable housing will become. Those who really want affordable housing should be cheering asset deflation.

Additional details on the freeze can be found in Loan companies to ease terms on some Calif. mortgages.

Mortgage lenders Countrywide, GMAC, Litton and HomeEq have agreed to let many potentially distressed borrowers in California keep the initial low rates of their home loans, a spokeswoman for Gov. Arnold Schwarzenegger said on Tuesday.

Schwarzenegger aide Sabrina Lockhart said his office negotiated an agreement with Countrywide Financial Corp (CFC), GMAC (GMA), Litton Loan Servicing LP and HomeEq Servicing Corp that will allow their mortgage borrowers in California to continue paying loans at initial rates if they live in their homes and make payments on time but are unlikely to afford higher payments when their mortgage interest rates reset.

My Comment: OK - Who gets to determine who is likely or unlikely to be able to afford higher payments? Even if such a determination could accurately be made, this program is rewarding (on the surface anyway) those who least likely had any business buying a home in the first place.

Schwarzenegger's office estimates 500,000 Californians hold subprime mortgages whose rates will reset at higher levels over the next two years.

Lockhart said the governor's office wants the agreement, based on a proposal by Federal Deposit Insurance Corp. Chair Sheila Bair, to stand for five years, but said how long it stays in effect at each company will depend on individual circumstances.

"I think it's safe to say we would consider five years to be reasonable," said Countrywide spokesman Rick Simon. The company said the state program principles closely matched its plan announced last month to help more than 80,000 borrowers.

My Comment: Here is the official translation. Countrywide cannot stand another 80,000 REOs.

Litton Loan President Larry Litton Jr. said a five-year extension of current rates for some borrowers was justified given the housing market's slump, financial hardship in many households and anxiety among mortgage investors.

"At the end of the day we're able to align the borrowers' interests with the investors' interests, saving everybody money," Litton said in a telephone interview.

My Comment: This is nonsense of course and has nothing to do with "alignment". It is a desperation move seeing to stop foreclosures and a buildup of REOs. Most of those who will allegedly be "saved" are in all likelihood better off walking away.

Schwarzenegger said the agreement would prevent thousands of foreclosures and urged borrowers to embrace it.

"Borrowers need to do their part, too," Schwarzenegger said in a statement. "If these lenders are willing to meet more than halfway, it's important that consumers don't run when they reach out. It was a two-way street that got us into this mess and it will be a two-way street that gets us out."

My Comment: Borrowers are not going to be able to do their part whether they want to or not as soon as they lose their job in the upcoming recession.

Along with loan modification, the lenders have agreed to seek out borrowers before their loan terms reset and to improve the process of determining if borrowers can afford bigger mortgage payments when loan rates rise, Lockhart said.

My Comment: All of a sudden Countrywide gets to determine what someone can or cannot afford or on an ongoing basis. Obviously this cannot possibly work over the long haul, perhaps even the short haul.

The FDIC's Bair said in a statement the California loan modification program could serve as "catalyst" for similar efforts in other states.

"Clearly, the state of California is on the front lines confronting the turmoil in the housing market," Bair said. "Vigorous and transparent implementation of this agreement will be important going forward."

My Comment: Clearly, the state of California was and still is on the leading edge of lunacy when it comes to the housing bubble.

The Freeze Will Fail

It has to. Countrywide Financial Corp., GMAC Mortgage, Litton Loan Servicing and HomeEq Servicing are all trying to stem the tide of foreclosures. But this is just subprime wave number one. Subprime wave number two hits next year, followed two more waves of Alt-A and Pay Option ARM problems as the following chart shows.



The only solution to this mess is to let the free market sort these problems out. Throughout history every attempt at wage and price freezes has failed. Mortgage freezes are just another shell game and will not work either.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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