The headlines have been shouting about pending foreclosures as subprime loans and other ARMs reset and result in unaffordable payment for borrowers who got into the homes on teaser rates. Talk! Talk! Talk! What are the results?
Darn little, it seems. One study stated than lenders have renegotiated less than 1% of their loans. How long will it take to contact and work with the millions they haven’t called yet?
FHA announced a rescue plan but it appears as if the criteria they are using are not much different than their normal underwriting criteria. I hope that changes because it isn’t going to be much help to the stressed homeowners. The targeted group numbered only 80,000.
Countrywide announced a plan to work with more than 80,000 of their 7,000,000 plus borrowers. But this seems like a drop in the bucket and again, it probably doesn’t have impact on the borrowers that need it most. Countrywide was a pretty big player in this market.
In a separate announcement, they noted that they are adopting new underwriting rules. It’s not like this was voluntary because these were essentially mandated by the government. The new rules require, for example, that Option ARMs, the negative-amortizing loans with the low teaser rates, be underwritten as the full index plus marking rate and 30 year amortization.
Countrywide acknowledged that had these rules been in effect a year earlier 89% of these loans would have been denied. Sorry for making an embarrassing point here but it looks as if these new rules will now prevent borrowers from refinancing out of their current loans. Who IS going to refinance them, especially when you consider that values have dropped and they are under water?
I also hear stories of the experiences of people with other lenders. The lenders are going to their best customers, the A-paper borrowers who could get a loan anywhere, and are offering them excellent terms to stay so that the lender keeps the profitable servicing rights.
In effect, rather than serve the most needy, they are going to their most creditworthy customers and making sure they don’t lose them. That may be good for them, but it sure isn’t a way to solve the problem. It also reflects a problem that no one seems to want to acknowledge: the "lender" isn’t really the lender. He’s the party that "services" the loan for the investor and he doesn’t get hurt by a foreclosure.
I finally heard one suggestion from Washington DC that mirrors my own recommendation. That is to keep the borrower at whatever initial rate they started out at. If they were at 5%, leave them there instead of raising it to 8%. Presumably the borrower could afford that so they can continue to afford it. The investor who really wanted the 8% return doesn’t get it, but he wouldn’t get it anyway. He’d own the house with nobody paying anything. Give people a five year window and many, many people would be able to work it out.
This would seem to have the government jumping in the middle of a private contract – the loan agreement – but it sure beats what is going on now, inaction that makes more foreclosures inevitable.
Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower
articles. Randy is a mortgage broker who has financed over $1 billion
in properties. He writes about home buying and real estate finance
topics for CreditBloggers.com.
Randy Johnson Randy is a Credit.com contributor and seasoned mortgage expert. He writes about home buying, mortgage laws and real estate finance issues. He has financed over $1 billion in properties, is the author of How to Save Thousands of Dollars on your Home Mortgage and he is a feature columnist for Savvy Borrower.
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Yup, that’s an easy solution to the whole mess, and it’d make a whole lot of people very happy. I wouldn’t be one of them because I actually had to foresight to go for a fixed-rate loan at a higher APR. If my bank voluntarily fixed these variable-rate loans at a lower rate than mine, I would certainly ask for them to lower my rate and sue them if they didn’t. If the government mandated that variable-rate loans have their rates fixed, I’d sue them instead. I bet a lot of upset investors would join me, too.
Randy, I agree. Fixing the rate for borrowers who can afford the payment (without them having to pay the expense of refinancing) makes sense. Unfortunately, many borrowers really couldn’t afford the loan period. But for those who can, it will help a great deal — at least for the time being.