Friday, December 7, 2007

The Mortgage Plan

The administration rolled out its mortgage initiative late this week. The plan will help 340,000 mortgage holders whose teaser rates are due to reset. Another 60,000 sub-prime customer are already so far behind on payments that they will not qualify for the plan. The standards for inclusions in the plan require that “the loan must have been originated between January 1, 2005 and July 31, 2007 when underwriting standards were at their worst. They must also have been made for at least 97 percent the value of the home, and the borrower cannot be more than 30 days delinquent.” The rate freeze scheme would lock in the initial teaser rates for a period of five years, avoiding payment increases for homeowners.

With an estimated 1.4 million homeowners expected to enter foreclosure in 2008, any plan that will possibly enable nearly a quarter of the houses to escape the situation is likely to be received positively on Wall Street. Reducing the number of foreclosures by 25% clearly reduces the stress on mortgage-backed derivative debt.

However the immediate upbeat reaction ignores the reality that the bulk of outstanding mortgages are still likely to flounder. A report released today shows that mortgage delinquencies have risen to a 20 year high. One in five adjustable-rate sub-prime loans had late payments in the quarter. The deterioration of the housing situation is accelerating. The U.S. is likely to establish new standards for peaks in foreclosures, crests that even exceed those in the 1930s.

U.S. Mortgage Delinquencies Rise to 20-Year High

Subprime plan seen reaching 340,000


Katie said...

...not to mention that this simply insults those of us who are fiscally responsible.

GregB said...

Keep in mind that the "Mortgage Plan" is really a bailout of the banks rather then the homeowners. The concept of moral hazard equally applies to the banks irresponsible behavior. This was discussed in an earlier post:

The Mortgage Bailout: Moral Hazard