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Homeowners See Possible relief... Pro's and Con's Abound

The cat is out of the bag, and it looks like there may be help for people who are facing unmanageable ARM's. Now *some* people with these sub-prime mortgages can get their teaser rate frozen for 5 years in order to avoid impossible payments.

The New York Times has a good article discussing the widely varying views concerning the new proposal. Let me first give a brief description of the plan Bush announced to help bailout homeowners. This proposal will only work for homeowners who:

  • Took out their loan between January 2005 and July 2007 and whose rates are set to increase between January of 2008 and July of 2010
  • Have less than 3% equity in their homes
  • Are current on their payments (or no more than 60 days behind)
  • Are able to handle their current lower rate, but will not be able to handle a higher payment.

Why this plan makes sense:

  • An estimated 250,000-360,000 homeowners may now be able to avoid foreclosure
  • It is being industry-led, not government mandated, meaning each lender can set their own criteria for approval
  • Bank losses are estimated to be 40%-50% on a foreclosure, this should help reduce their red-ink margins

Why this plan doesn't make sense:

  • People deemed to be hopelessly in debt may not be qualified by their lender
  • People with higher credit scores may be deemed ineligible because of their higher credit rating
  • The plan is seen by many as a type of reward to people who spent beyond their means, and could encourage reckless spending
  • Investors are unhappy with increased income returns being frozen
  • The plan is voluntary rather than government mandated, meaning investors can choose to not participate in the program.
I'm sure there's going to be plenty of debate for weeks to come on this plan, but until we have a better idea of how many people will be affected, it's very hard to say how good this is for the homeowners and how bad it is for the investors. I admit I'm a bit of a bleeding heart, and right or wrong, I think any help like this to homeowners is a positive step.
Posted Friday Dec 07
( 12/07/07 11:06AM ) — Frank Jewett

The pro is that the fallout from widespread foreclosures would hurt everyone, including the people who are paying their mortgages on time, because it would cripple the economy.

The con is that when you reduce the penalties for taking risks, you encourage more risk taking.

I don't want to debate immigration policy, but offering amnesty to solve the immediate problem created the expectation of future amnesty which actually increased the problem.

Whatever we do to deal with the effects of the problem, we had better deal with the source of the problem too, because medicating the effects alone always leads to bigger problems down the road.

One idea: Limit annual rate increases to 1/2 percent.  Limit life of the loan increases to 5 percent.

Essentially get rid of the "teaser rate" loan instruments that created the problem of monthly payments doubling overnight.

( 12/07/07 11:29AM ) — Bob Mitchell - Realtor St. Louis

Personally, I don't think that this plan will work.  There are too many steps in the process.  IF you qualify, you still need to get your servicer on board and that's if the end holder of the securitization that your mortgage is part of is on board.

Also, MARK MY WORDS, the investors who are going to be forgoing the higher interest rates are going to show up at that government tit demanding reimbursement for these "losses" forget the fact that these "losses" are going to probably be less than if they had to foreclose.

 

Bob Mitchell

ValueList Real Estate Services, Inc. 

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