Bush's Bogus "Rate Freeze" Plan

They don't have the answers, because they don't even know the right questions.

Let me start off by saying that I strongly oppose the proposed 5-year "rate freeze" plan that President George Bush has suggested to the American public in regards to subprime loans set to "readjust" to higher interests rates, with the ambition to "curb" the number of foreclosures set to take place in the housing market over the next 24 months.

I pose this question, "How can Uncle Sam get that right when the President can't even put out the right toll-free number on December 6th, while making a public address on national television, promoting the new "Hope Now Hotline" set up by his administration?

President Bush stated, "And I have a message for every homeowner worried about rising mortgage payments: The best you can do for your family is to call 1-800-995-HOPE. That is 1-800-995-H-O-P-E," he said.

Anyone who dialed 1-800-995-HOPE was greeted by just a busy signal, because the correct "Hope Now Hotline" number is 1-888-995-HOPE.

I'll set the stage, so you can see the "Big Picture" and flaws in President Bush's "rate freeze" plan.

Back in the old days, you would walk into a bank and apply for a home loan. You had a relationship built with that bank. They knew your ability and willingness to make good on borrowed money, and you knew where to go to make payments and find them if needed. You knew who "carried the mortgage" on your home and you would have the ability to sit face-to-face and "renegotiate" terms if you were in trouble, as long as it was agreeable to both parties.

In reality, very few mortgages today are "portfolio" loans, held by the original bank that underwrote the loan and lent you money. Why? The banks would rather make a loan to you with a set profit, "service" all of the home loans they underwrote for a small fee every month and "free up" their capital by selling off the loan on the secondary market to investors to make new loans. This system creates much less risk for the bank, since those loans underwritten are not on their balance sheets, rather, in the hands of investors.

So, here's what generally does happen today.

Let's say your name is Bob. 10 Bob loans will be "bundled together', which have similar characteristics, to be placed into a "mortgage backed security", to be sold on Wall Street to investors in the US and across the world. You may be paying Wells Fargo or Countrywide for your mortgage every month, but an investor in Japan may actually "hold" your mortgage.

Now think about this. You are a full grown adult that has entered into a "legal binding contract" to make good on the mortgage. Meanwhile, you have the bank that is typically just "servicing" the loan and an investor (Note that not all investors are "Big Time Wall Street Investors!" Potential losers include; pension funds for teachers, firemen, police and an array of mutual funds, whose clients are individual investors.) Now the US Government steps in and says, "We're going to freeze interest rates on your investment for 5 years!" Let me ask you, what investor in their right mind would allow anyone to devalue their investment? Especially the Government!

Do you see the fundamental flaw? Times have changed and the way that our mortgage system works is much more different and complex then the old days. If we are to see a "free up" of capital into the mortgage markets to lend money again, there needs to be confidence on Wall Street that Uncle Sam isn't going to step in and "freeze" their investments. Otherwise, most investors will take their money elsewhere, with less risk and the same returns. When investing in "subprime" loans, investors took the "calculated risk" that those mortgages might end up defaulting or going into foreclosure. Why? The returns are better. Again, we are setup as a risk and reward economy folks.

One of the main reasons why the Real Estate market is having trouble right now in the US, with an abundant amount of homes on the market,  is the lack of money being instilled back into the mortgage process by investors, creating "liquidity issues" for banks and purchase money for homebuyers.  The hold up is due to investors not being happy with the underwriting practices of lenders. After all, once it's off their books, "it's not their problem!" The free market is now driving the mortgage industry to go back to the fundamentals of underwriting with higher credit score requirements, lower loan to value ratios and the documentation of income, assets and job history. If "mortgage backed securities" stop selling on Wall Street because of Government intervention, the flow of money for banks to lend out on will "dry up" even more, creating less "willing and able buyers" to buy homes in the "buyers market" we are currently in. 

To that thought, I pose a few major fundamental questions that need to be answered in regards to President Bush's "rate freeze" plan.

1.) Do you think President Bush's plan is really about helping homeowners or more about covering the "ASSets" of lenders?

Certainly, from a political standpoint, it looks great in the American eye that you're trying to do something. However, many have stressed that this is nothing more than a political ploy around an upcoming election year to make it appear as though they are actually doing something about the foreclosure/lending problem. Presidential contender Sen. Hillary Clinton is already talking about stretching it to seven years, and that bidding war has just begun.

If you dissect President Bush's plan, two main criteria need to be in place in order to be eligible under the "rate freeze" plan:

A.) You can't have any past or current mortgage lates on your mortgage

B.) You must have less than a 3% equity position in the property.

To me, that sounds like you're trying to entice subprime homeowners to pay their mortgage on time, when they probably would have walked away from their home, because the loan was set to "readjust" to a higher payment they couldn't afford in a home that is worth less then they could sell it for.

In my mind, you are only delaying the inevitable. The idea of carrying out the foreclosures for an additional 5 years will only drag out the "market correction" that MUST take place for home values to be in line with incomes once again!

2.) Why should those with bad credit, living in homes beyond their means be rewarded, while those that are in the same position with good credit be ignored?

There needs to be a level playing field!

3.) What ever happened to a Capitalistic, free market?

One of the joys of living in the United States is the ability to make your own free decisions, based on a risk and reward system. Should you make good decisions, you will most likely be rewarded. On the flipside, should you make bad ones, you may take a loss. Trust that I have compassion for families that are set to lose their homes. Certainly, no one likes to see that and it is bad for the psyche of our country. But a "rate freeze" doesn't enable the person that made bad choices to make better ones. In fact, it only breeds more bad decisions by rewarding bad past decisions.

Honoring contracts and property rights is absolutely essential to the proper functioning of a free society and free economy. A mortgage is a binding contract between consenting adults. A mortgage-backed security is private property. It is the antithesis of a free market for the government to fix prices, pressure mortgage service companies into renegotiating contracts, and thereby expropriate property rights of those stuck holding mortgage-backed securities

So there you have it. President George Bush's "Rate Freeze" plan. One that lawyers will have a field day on, as contracts are enforced and securities are jeopardized, while the faith in the current mortgage system by investors is lost!

I urge you to get the facts and voice your opinion.

Here are some quick facts about President George Bush's "Rate Freeze" plan:

How many will be affected? The estimated number of loans affected by President Bush's proposed plan will be between 145,000 and 360,000.

Which adjustable-rate mortgages are affected? To qualify to have their interest rate frozen for five years, home owners must have received a loan sometime between Jan. 1, 2005, and July 31, 2007, and be facing a reset of their interest rate sometime between Jan. 1, 2008, and July 31, 2010.

Who qualifies for this deal? Home owners who haven't missed a payment, but who might if their mortgage resets. Those who can't afford the higher payments, and who have credit scores below 660 and less than 3 percent equity in their homes, will get the biggest break from the lenders. People who are financially secure enough to pay the higher mortgage payments don't qualify.

Do owners of second homes or investors qualify? No. The plan excludes people who don't live in the property that's facing foreclosure.

Written By:

Scott Gormley

Broker/Owner

Oak Valley Mortgage

Direct: 530-592-8362

Email: Scott@OakValleyMortgage.com

Website: http://www.caloan.com/

"You Find the Perfect Home, We'll Find the Perfect Loan!"