FDIC to mortgage servicers: Freeze ARM rates

VTGreg · 10-17-2007, 02:46 PM

http://money.cnn.com/2007/10/05/real...ion=2007100911

Quote:

FDIC to mortgage servicers: Freeze ARM rates
Top bank regulator suggests industry cuts losses now to prevent foreclosures.
By Jeanne Sahadi, CNNMoney.com senior writer
October 9 2007: 11:33 AM EDT

NEW YORK (CNNMoney.com) -- The heat on U.S. mortgage lenders and servicers was turned up a few degrees this week when the country's chief bank regulator publicly proposed that they permanently freeze interest rates on subprime adjustable-rate mortgages (ARMs) for many homeowners.

"Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it," Federal Deposit Insurance Corp. Chairman Sheila Bair said in prepared remarks at an investor's conference.

ARMs often have a low introductory interest rate for two or three years and then reset to much higher levels.

Roughly 1.3 million subprime ARMs are due for a rate reset between now and the end of 2008, according to data from First American Loan Performance.

Bair proposed that servicers convert only those ARMs that haven't reset yet and only for borrowers who are current in their payments and occupy their homes. Loans taken out by speculators who don't live in the homes they bought would not qualify for the automatic conversion.

Consumer advocates have also been calling on lenders and servicers to modify subprime mortgages to make the payments affordable for homeowners who would struggle to keep the house once their rates reset. But rate reductions, while they do happen in some cases, are far from widespread, they say.

"We can't just sit here doing this kind of case-by-case, laborious restructuring process with all these millions of subprime hybrid ARMs," Bair said, citing a recent Moody's survey, which found that less than 1 percent of problem subprime ARMs were being restructured.

"[Bair's recommendation] is exactly what's needed," said Michael Shea, executive director of ACORN Housing, which has offices around the country where counselors have been working with troubled homeowners to renegotiate their subprime mortgages with servicers.

Mortgage servicers - those that administer and collect payments on the loans - may be restricted by the terms of their pool servicing agreements (PSAs), which are their contracts with the investors who own the loans being serviced. Those contracts may specify when and how many loans may be modified.

But the servicer typically does have discretion when a loan has become or is likely to become delinquent. And investors are unlikely to object if the servicer can make the case why a modification will lose less money than a foreclosure, said William Rinehart, vice president and chief risk officer of Ocwen, a loan servicer that administers 470,000 loans.

And in many instances, foreclosures can create bigger losses for investors. "[E]ffective restructuring can preserve credit support [and] reduce credit losses," Bair told the investor conference.

If servicers acted on Bair's suggestion verbatim, "you'd likely have a backlash, particularly from your senior investors," said Larry Litton, president of Litton Loan Servicing, which has been proactive about contacting borrowers before their rates reset and modifying their loans in instances where a rate reset would make the home unaffordable for them.

The message Litton thinks the industry will take away from Bair's proposal is "you have to do a better job of fixing loans that are fixable. And if you don't do it, someone else will do it for you," he said, noting, for instance, that a proposal on the Hill to let bankruptcy judges reduce the mortgages of borrowers filing for Chapter 13 would not go over big with the industry.

I guess it is really up to the investors, but I would be slightly upset if this move was made. You are rewarding reckless behavior. If this does come to fruition, those individuals that have ARM's should count their lucky stars because this would be a huge windfall.

zippyjuan · 10-17-2007, 07:12 PM

That is not right. If you want to do that, then I want my mortgage dropped down to the same rate that adjustables were when I took it out and a refund of the additional sums I have paid since. There is a known risk in adjustable mortgates and I agreed to pay a premium to remove that risk. If this happens, they are having that risk removed without paying the premium.

Cubsfan · 10-17-2007, 07:19 PM

I agree that this would irritate me. I'm not entirely sure what they could do to 'fix' the situation that wouldn't irritate me though. Maybe if they converted them all to 30 year fixed, but at the rate that a 30 year fixed was at when they took out their loan? Maybe 1% higher than that?

catch22 · 10-17-2007, 07:37 PM

I agree too, this is utter BS I would be pissed too, reward those that foolishly get in over their heads, while those that did the smart thing will be the ones holding the bag.
The problem with converting them to a fixed 30 year, was that most of them could not qualify for one. With property prices dropping, the equity in their homes would drop too, in most cases they also have 2nd loans in order to get their 1st loan. I do not see a "fair" out. I do feel bad for people, but that is why you were taught to read and verify documents before signing. Those that have had their homes for a long time (5-10 years) have seen a sizable increase in their property values, lots of equity built up (enough to buy one or two of these upcoming foreclosures and rent them out).

VTGreg · 10-17-2007, 08:00 PM

I had the exact same initial reaction since I also have a 30 year fixed but if you think about it in terms of the investors it makes sense for them to keep the rate the same or they risk losing money via foreclosures.

zippyjuan · 10-17-2007, 08:07 PM

Given that it is several years that you have an adjustable loan before it adjusts, under the conditions that most of the creatively financed ones were issued, they should have several years of equity built up and should not be facing negative amortization yet- even if prices have fallen in their region. Most should be elgible for standard refinancing of their loans.

The loan purchasers only lose money if a house goes into forclosure- and how much then depends on what the house resells for. If a loan is refinanced, the original one is paid off and they receive their principle plus whatever interest has been paid to date.

renovation · 10-17-2007, 10:33 PM

the whole U.S. mortgage lenders industry needs to be overhauled. now that there messed up so many lives. but here in michigan and im sure other states to they have. dreamed up a new game to toss at us thats not come to light yet . to have are retired parents and grand parents. take zero payment loans out on there homes. and when they pass lets let the familys worry about paying the house off. sure they sell the house anyway but while there trying to figure out who get what. we just foreclose on the house for that owed left on it. and make a good penny. odds are they'll take the moneys loan them to upgrade the home. (is what the mortgage companys betting on ) so the kids will get the most $$$$ on the sale of the house. thats what the 2 faced lenders figuring on is he forclose on the home and making a lot more cash. then the home's orginal loan . seeing that the parents made all those payments for nothing .

zippyjuan · 10-17-2007, 11:14 PM

Are you talking about reverse mortgages?

VTGreg · 10-18-2007, 06:43 AM

Quote:

Originally Posted by renovation

the whole U.S. mortgage lenders industry needs to be overhauled. now that there messed up so many lives. but here in michigan and im sure other states to they have. dreamed up a new game to toss at us thats not come to light yet . to have are retired parents and grand parents. take zero payment loans out on there homes. and when they pass lets let the familys worry about paying the house off. sure they sell the house anyway but while there trying to figure out who get what. we just foreclose on the house for that owed left on it. and make a good penny. odds are they'll take the moneys loan them to upgrade the home. (is what the mortgage companys betting on ) so the kids will get the most $$$$ on the sale of the house. thats what the 2 faced lenders figuring on is he forclose on the home and making a lot more cash. then the home's orginal loan . seeing that the parents made all those payments for nothing .

If you're talking about a reverse mortgage the payments weren't made for nothing. They are taking back out the equity of their home, which they made payments to build, slowly in the form of payments.

Thesifer · 10-18-2007, 06:56 AM

-Haven't looked at the Data on this yet- But I believe they are doing this because of the amount of default they will have if they don't. They are already at record numbers. I was discussing some of this with a former Underwriter during the "Housing Boom," and she said that she puts the blame 50/50 on the part of the House Purchaser and the house Lender.

Basically, the borrower did have the opportunity to try and read through the 30 page document that they signed, but most of them couldn't completely understand it, and just saw "House Owner" in their Future.

On the other hand, the Lenders did a lot of shady things to get people into houses, and told them that they would be able to afford it, after looking at their "Stated income" (as a lot of them were not requiring any PROOF OF INCOME)

So basically, while this could suck or seem unfair to the people that have 30 year fixed, or that are savvy enough to not have got themselves into a bit of a pickle, it could also be necessary if we don't want to crash our entire market.

renovation · 10-18-2007, 05:59 PM

Quote:

Originally Posted by zippyjuan

Are you talking about reverse mortgages?

yes i am . i feel there just as shady !

cruelpupet · 10-18-2007, 07:15 PM

Basically its kinda like a mispriced web item. Orders are canceled or reoffered at the real price, enough people got in on the deal and complained, so the retailer might give them the price break and lose a bit of money.

I thnk thats the best analogy that can be made to this.

ray · 10-18-2007, 09:51 PM

Quote:

Originally Posted by zippyjuan

That is not right. If you want to do that, then I want my mortgage dropped down to the same rate that adjustables were when I took it out and a refund of the additional sums I have paid since. There is a known risk in adjustable mortgates and I agreed to pay a premium to remove that risk. If this happens, they are having that risk removed without paying the premium.

I completely agree with Zippy on this. I don't own a house, but if I were in a situation where I paid a higher premium just to mitigate risk, and then these people who have zero financial sense get cut some slack for essentially being morons, I would be pissed.

10-17-2007, 07:12 PM	#2
zippyjuan Picture of the Day Guru Join Date: Oct 2002 Location: Sunny San Diego Posts: 8,756	That is not right. If you want to do that, then I want my mortgage dropped down to the same rate that adjustables were when I took it out and a refund of the additional sums I have paid since. There is a known risk in adjustable mortgates and I agreed to pay a premium to remove that risk. If this happens, they are having that risk removed without paying the premium. __________________ I add new pictures to my photo gallery pretty regularly. You can see them here if you are interested: http://www.pbase.com/jeffryz

10-17-2007, 10:33 PM	#7
renovation Admiral Join Date: Jan 2003 Location: You could pick up Lindsay Lohan for less than a intel 990x, and still have money left over to bail her outta jail Posts: 5,029	the whole U.S. mortgage lenders industry needs to be overhauled. now that there messed up so many lives. but here in michigan and im sure other states to they have. dreamed up a new game to toss at us thats not come to light yet . to have are retired parents and grand parents. take zero payment loans out on there homes. and when they pass lets let the familys worry about paying the house off. sure they sell the house anyway but while there trying to figure out who get what. we just foreclose on the house for that owed left on it. and make a good penny. odds are they'll take the moneys loan them to upgrade the home. (is what the mortgage companys betting on ) so the kids will get the most $$$$ on the sale of the house. thats what the 2 faced lenders figuring on is he forclose on the home and making a lot more cash. then the home's orginal loan . seeing that the parents made all those payments for nothing . __________________ You could pick up Lindsay Lohan for less than a intel 990x, and still have money left over to bail her outta jail

10-18-2007, 06:56 AM	#10
Thesifer Vice Admiral Join Date: Jun 2003 Location: Oklahoma Posts: 4,338	-Haven't looked at the Data on this yet- But I believe they are doing this because of the amount of default they will have if they don't. They are already at record numbers. I was discussing some of this with a former Underwriter during the "Housing Boom," and she said that she puts the blame 50/50 on the part of the House Purchaser and the house Lender. Basically, the borrower did have the opportunity to try and read through the 30 page document that they signed, but most of them couldn't completely understand it, and just saw "House Owner" in their Future. On the other hand, the Lenders did a lot of shady things to get people into houses, and told them that they would be able to afford it, after looking at their "Stated income" (as a lot of them were not requiring any PROOF OF INCOME) So basically, while this could suck or seem unfair to the people that have 30 year fixed, or that are savvy enough to not have got themselves into a bit of a pickle, it could also be necessary if we don't want to crash our entire market. __________________

10-18-2007, 07:15 PM	#12
cruelpupet Admiral Join Date: Jan 2001 Location: NYC Posts: 6,302	Basically its kinda like a mispriced web item. Orders are canceled or reoffered at the real price, enough people got in on the deal and complained, so the retailer might give them the price break and lose a bit of money. I thnk thats the best analogy that can be made to this. __________________ Am I alone here? Is that it? Am I the only one who sees. Maybe we can learn to be just like him. Wear a little uniform. Yes, sir. No, sir. Thank you, sir.

Thread Tools	Search this Thread
Show Printable Version Email this Page	Search this Thread: Advanced Search
Display Modes
Linear Mode Switch to Hybrid Mode Switch to Threaded Mode

10-17-2007, 07:19 PM	#3
Cubsfan Rear Admiral Lower Half Join Date: Jul 2001 Location: Colorado Posts: 2,743	I agree that this would irritate me. I'm not entirely sure what they could do to 'fix' the situation that wouldn't irritate me though. Maybe if they converted them all to 30 year fixed, but at the rate that a 30 year fixed was at when they took out their loan? Maybe 1% higher than that?

10-17-2007, 07:37 PM	#4
catch22 Lieutenant Junior Grade Join Date: Oct 2003 Posts: 57	I agree too, this is utter BS I would be pissed too, reward those that foolishly get in over their heads, while those that did the smart thing will be the ones holding the bag. The problem with converting them to a fixed 30 year, was that most of them could not qualify for one. With property prices dropping, the equity in their homes would drop too, in most cases they also have 2nd loans in order to get their 1st loan. I do not see a "fair" out. I do feel bad for people, but that is why you were taught to read and verify documents before signing. Those that have had their homes for a long time (5-10 years) have seen a sizable increase in their property values, lots of equity built up (enough to buy one or two of these upcoming foreclosures and rent them out).

10-17-2007, 08:00 PM	#5
VTGreg Rear Admiral Lower Half Join Date: Jun 2002 Location: Charlotte, NC Posts: 2,533	I had the exact same initial reaction since I also have a 30 year fixed but if you think about it in terms of the investors it makes sense for them to keep the rate the same or they risk losing money via foreclosures.

10-17-2007, 08:07 PM	#6
zippyjuan Picture of the Day Guru Join Date: Oct 2002 Location: Sunny San Diego Posts: 8,756	Given that it is several years that you have an adjustable loan before it adjusts, under the conditions that most of the creatively financed ones were issued, they should have several years of equity built up and should not be facing negative amortization yet- even if prices have fallen in their region. Most should be elgible for standard refinancing of their loans. The loan purchasers only lose money if a house goes into forclosure- and how much then depends on what the house resells for. If a loan is refinanced, the original one is paid off and they receive their principle plus whatever interest has been paid to date.

10-17-2007, 11:14 PM	#8
zippyjuan Picture of the Day Guru Join Date: Oct 2002 Location: Sunny San Diego Posts: 8,756	Are you talking about reverse mortgages?

User Name
Password
Remember Me?