Not that helpful

Atrios summarizes the Bush plan to prevent more mortgage defaults due to “exploding ARMS” (adjustable rate mortgage resets):

People who qualify:
— have an income and live in their homes
— are currently making their payments on time
— would default if their interest went up

— ARM mortgage has to have been taken between 1/05 and 7/7
— Has a rate reset between 1/8-1/10

And you don’t qualify if:
— have missed payment
[not exactly accurate, see Bloomberg below]
— can afford mortgage rate increase
— don’t have an income
— own homes which are worth less than their mortgage

The last one is the kicker, as it kicks out the class of people who might actually be able to refinance on their own.

I’m not sure what that last line means, but the general point — that this plan is only for a limited class of people with spotless payment records whose sole problem is that they were deceived (or oblivious) about the interest rate they bought into — seems pretty accurate. I don’t think it’s going to accomplish much in Cleveland. Hope I’m wrong.

Update: Bloomberg

More than 30 percent of borrowers with subprime adjustable- rate mortgages are behind on their payments before their loans reset at a higher rate, according to estimates from analysts at Credit Suisse Group. The bank projects 775,000 homes with $143 billion of mortgage debt will go into foreclosure in the next two years…

To be eligible [for the Bush-Paulson plan], borrowers must not be more than 60 days behind in their payments, have less than 3 percent equity in their property…

House Financial Services Committee Chairman Barney Frank said he told Paulson today that he opposed the agreement’s cut- off of borrowers with credit scores above 660 out of a possible 850.

Update 12/7: A small correction — “spotless credit record” is not a requirement, though “almost spotless payment record” is. As the quote from Barney Frank makes clear (Atrios as well, though in a confusing way), one of the criticisms of the “New Hope” plan is that it excludes borrowers with credit scores above 660. If you’re interested in the deep technicalities of why this might be (via a thrilling descent into the securitization twilight zone of REMICs and Pooling and Service Agreements), see Calculated Risk.

A more important criticism is that it’s going to help very few people who actually need help, especially in northeast Ohio. The NY Times this morning:

Although Mr. Bush unveiled the plan at the White House on Thursday, its terms were set by the mortgage industry and Wall Street firms. The effort is voluntary and it leaves plenty of wiggle room for lenders. Moreover, it would affect only a small number of subprime borrowers…

The heart of Mr. Bush’s plan is a cautious attempt to help troubled homeowners by persuading financiers to freeze mortgages at low introductory rates for five years, but without actually forcing the hands of lenders and investors who hold the mortgages.

One of the financial industry’s lead negotiators estimated that at most 20 percent of subprime borrowers whose payments will increase sharply over the next 18 months — 360,000 out of 1.8 million people — would qualify for rapid consideration of a special five-year freeze on interest rates.

The number of people who actually obtain help would be smaller, because each borrower would face tests aimed at weeding out those considered too hopelessly in debt and those who make too much money to justify relief.

A Reuters story quotes this assessment by Inez Killingsworth of ESOP

“Making this plan voluntary is like asking a crook to turn themselves in. With this meltdown of the subprime market, the mortgage industry has proven that it cannot self-regulate,” said Inez Killingsworth, President, Empowering and Strengthening Ohio’s People, Cleveland. “It is time to get serious about helping homeowners and saving the economy from a further meltdown. This just redlines everybody who is in trouble right now.

(c/p CCD)


Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: