Well … this should get interesting.

So, a bunch of people took out loans on their home purchases and now can’t seem to repay them.

Perhaps you’ve heard about this?

Much hay has been sown (?!) about the issue, but little has changed, in my opinion.

Properties are still going into foreclosure, financial institutions are still afraid to make any loans, the US economy seems on the edge of a recession.

Not good.

What should happen to the typical person who took out a loan one or two years ago, who can’t make his or her next loan payment? Kick them out of their homes? Let them live for free? Send them to jail?

What should be the responsibilities of lenders, other owners, citizens, and the governments (local and US) in resolving this mess?

No, really, I’m asking you.

Anyway, today a new idea was proposed.

One I would call, “radical”.

Here are some details, from the Journal:

The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations …

… In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.

Many subprime loans carry a low “teaser” interest rate for the first two or three years, then reset to a higher rate for the remainder of the term, which is typically 30 years in total. In a typical case, the rate would rise to around 9.5% to 11% from 7% or 8%. That would boost an average borrower’s payment by several hundred dollars a month.

Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. Under one scenario, the freeze could run as long as seven years. The parties are developing standard criteria that would determine eligibility. The criteria should be finalized by the end of year.

(SEVEN???)

Hmm. One thing I don’t think you’ll hear too much about is this:

A huge number of those people who are going into foreclosure are doing so while still paying (or, not paying, LOL!) at the same interest rate as when they first took out their loans.

Their loan interest rates have not yet reset.

So, off the bat, thousands, or hundreds of thousands, of people will not be helped.

And, I am willing to predict, a lot of those (the majority) of people who end up having their loan interest rates fixed at their current rates will still end up in foreclosure.

They were in over their heads, from before day one.

Does the benefit of helping the few outweigh the cost?

I’m not sure I can buy into this idea, at least as currently proposed.

(** Superstar mortgage blogger Holden Lewis has his own take on the issue – one thing he points out that I hadn’t thought about is that freezing the rates for so many people will artificially inflate the cost of many properties that would otherwise become affordable for more buyers … meaning they won’t be able to afford to buy a home in the near future.

Another group of “losers”? Real estate agents. Because more people will be able to hold onto their homes, there wont’ be as much turnover in homes as there would be, otherwise. Pity us.

** Oh, and the biggest “losers”? Responsible people who took out loans they can actually pay, at higher rates. But you knew that already, right?)

More: U.S., Banks Near a Plan to Freeze Subprime Rates for Borrowers – By Deborah Solomon and Michael M. Phillips, The Wall Street Journal

Also: Confidence Game – By Holden Lewis, Mortgage Matters

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Updated:  1st Q 2018

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