BluefoxToday blog : Subprime mortgage rate freeze on thin ice

Subprime mortgage rate freeze on thin ice

When the Treasury Secretary announced in a recent speech that the Hope Now coalition is working on an ambitious plan to freeze interest rates on qualified mortgages, the mood among homeowners who could be positively affected surely was upbeat. Hope Now is an alliance of community, government and industry groups in search of viable solutions to the subprime mess. The aim is to rewrite eligible adjustable rate mortgages, or ARMs, so that when they reset, borrowers won't be burdened with unaffordable payments.

After a mortgage is issued, it typically is sold to the secondary market where it could be repackaged and sold again. Most of these debt obligations end up in the portfolios of large-scale investors, like pension funds and international entities. It is this sector of the vast mortgage market that is cool to the freeze proposal.

They have a good reason to be so. Upon buying these securities, they were guaranteed a certain rate of return and it would be against their particular objectives to give it up. A rate freeze would undoubtedly do that, cut deeply into their profits.

Mortgage servicers act as middlemen between borrowers and investors. They receive the payments and then forward monies to the investors according to the contract terms that exist between them. These contracts generally allow the servicers to rework up to five percent of loans within a particular batch, while going over that limit requires an approval. Hope Now draft appears to exceed this cap across the board. Therefore, without the investor consent the proposal has a considerable hurdle to climb.

Should the plan go forward, though, how would the investors be compensated for their losses? That's what they are worried about. The obvious answer is to reach into the taxpayer's pocket and that would amount to a federal government bailout. Rather unpopular undertaking among the large majority of the country.

Moreover, the investor community is now faced with the fact the U.S. government can intervene in the marketplace whenever it feels like and amend executed contracts to their detriment. They will accept that, but since this will add more risk to the debt obligations, they will require more return. More yield. As a result, mortgage rates will move higher for the home buyer.  


Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst - syndicated mortgage, housing and property management blog
My cell: 702-499-1006

Comment balloon 10 commentsEsko Kiuru • December 05 2007 10:05PM


Adding to the problem is that next year is an election year. Regretfully a lot of silly things happen that won't be realized until after the fact sometime in the fuure.
Posted by David Spencer, Show Me real estate in Kansas City (Keller Williams Northland) over 12 years ago


Let's see how the plan plays out.

Posted by Esko Kiuru over 12 years ago

Do the investors not feel they are at a higher risk by allowing these mortgages to go into foreclosure than they would be by helping borrowers who can & will continue making their payments if the rate/payment is frozen??    The more foreclosures, the lower the values.  The whole economy is going to suffer if something is not done to check the downward flow of values.  There are people who actually DID NOT lie, did full doc loans, etc., with the hope that they could move out of their ARM program with a refinance in a couple of years, who NOW CANT refinance due to the DROP in their PROPERTY VALUE due to REO sales. They also CANT sell, and since their properties are now worth $40,000 or so LESS than what they paid for it, many of them have no real reason to try to hold on, other than that their credit will be ruined. Of course, most people do not want to loose their homes & WILL continue to make their payments if given a chance to continue to do so, especially in light of the expected increase in costs to rent, also a result of the real estate mess.       Most investors should be able to see the value in keeping the owner-occupant borrowers in their homes, & lose a little on the interest rate, rather than take the hit at forclosure, with its accompanying costs, loss of principal, etc.        I have NO SYMPATHY for the borrowers and lenders who committed FRAUD which resulted in this mess - but I greatly worry about our economy if the mess isnt mitigated. 


Posted by McLeod =California over 12 years ago


Looks like Washington opted for the freeze when lenders weren't doing enough to help distressed borrowers.

Posted by Esko Kiuru over 12 years ago
I agree with McLeod but fear that mortgage rates will soar because of this.  I wonder if this will make people pull the trigger on buying a home, in fear that rates will climb.
Posted by Krista Fuchs, Chester County Realtor - (484) 459-8025 - Home Buying and Selling (Prudential Fox & Roach) over 12 years ago


Rates will go up a notch because investors see mortgage securities now more risky due to government interference.

Posted by Esko Kiuru over 12 years ago

The current swing in short term rates is the result of the this pipe dream someone has cooked up to try and shove the manure back into the goose's behind.

I'm all for salvaging any viable loans of the "rock pile" everyone is throwing these into. 

They will be hotter than Georgia Asphalt when they hit your warehouse line and the government will jack up the program without a doubt.  Could get stuck with them on your line for a period of time that would boil your profit marging and cause your demise.

Good luck with them.

Posted by Matthew Starr Longwell (Starr) over 12 years ago

Esko  ~   Well written post and this surely is something that can fuel a lot of debate.   As with most things, there are pros and cons on both sides of the argument.    I am concerned about government interference and the impact that will have on future sales of portfolios.  Will the investor now say - "well now I have to build in a contingency into the contract as it is now subject to government interference?  If so, how bad will that be?  

As there are comments about the "Mortgage companies" not going enough on their own to help stem this problem, I have to ask myself why investors themselves would not play a more active roll in solutions.   If they themselves, as a collective group of investors opt to modify terms, interest rates, prepayment, etc, for a period of time, (because as we all know, it surely would be in their best interst to avoid foreclosure and a total loss) they then do not need to worry about government intervention in their contracts moving forward.

Unfortunately, I believe we have now missed the opportunity to exclude the government's intervention.   Perhaps our next Commander in Chief might have a bit more rational perspective in making decisions with a bit more foresight and "big picuture consequences of its macho decisions" and might sign a bill that would make it illegal for them (the gov't) to modify contracts at their irrational discretion moving forward.

I am concerned about the effects this will have moving forward, and as so noted by may of my colleagues, this will likely push rates higher.... I'm already seeing evidence of that.

Posted by Linda Peters (Salem Five Mortgage Company) over 12 years ago


Now that the freeze is in effect, let's see how they work out the details.

Posted by Esko Kiuru over 12 years ago


Investors will request more yield, no question, and that'll push rates higher. The freeze wasn't a smart move.

Posted by Esko Kiuru over 12 years ago