RE:Senate ad hoc Committee Hammers out Housing Rescue Bill

punzah — Sat, 05 Apr 2008 11:00:00 GMT

Back at the end of 2006, even before it started in earnest, everybody familiar with the mortgage world agreed there would be a big problem when subprime ARMs started to have rate resets unless they could be refinanced. So what did the bank regulators do? The "Interagency Group" issued new lending "Guidance" that guaranteed that practically no subprime ARM could be refinanced. Very soon after that the investors in mortgage securities realized what was going to happen as a result, and the subprime paper became worthless almost instantly. That started a snowball effect leading to leading to a very general housing market collapse plus a worldwide credit crisis way beyond what anybody feared. Everybody still agrees that the crisis is still firmly rooted in the problems with subprime ARMs, so it is totally astounding that there still has not been one single proposal that I can find to compel changes in the toxic terms of those ARMs, either existing ones or possible future ones (there may not be future ones, since there are practically no subprime ARMs available that remotely resemble the ones that are now in trouble, and there are practically no subprime lenders left, and certainly no subprime investors). Instead of dealing directly with the toxic terms of subprime ARMs, what have the regulators and lawmakers done? They've attacked mortgage brokers, who are little more to blame for the general crisis than a clerk at McD's is who sells a bad burger from a bad batch of meat is responsible for a general outbreak of food poisoning, thrown hundreds of billlions of dollars of taxpayer money to bail out the banks and investors (the new Term Securities Lending Facitlity where the Fed lends Treasuries in exchange for mortgage obligations), and incentivized unfeasible refinances and future home buying. Any attempt to encourage refinances of subprime ARMs are in vain, only a miniscule fraction of them qualify to be refinanced due to the loss of equity, fewer applicable loan programs, way fewer lenders, and much stiffer guidelines for conforming and Alt-A loans. FHASecure could only help an estimated 240,000 out of the approximately two milllion subprime ARMs that are in trouble. The entire thrust of changes at Fannie and Feddie has been to make loans harder to get in the future. Efforts in the private sector, in particular the HopeNow alliance have been somewhat effective, but are too slow and piecemeal, and in most cases haven't solved the problem of restructuring the loans, they've just created a payoff plan to repay the exhoribant interest that was charged. The crisis can be solved in one bold sweep of the pen without costing the taxpayer one cent, and would not only rescue all the subprime defaults, but restore value to all the mortgage securities, and most likely stop or even reverse the decline of housing values. Either Congress or the President can use the power they have as confirmed by the Supreme Court in 1934 (Home Building and Loan, Ltd. versus Blaisdell) to intervene in mortgage contracts when the public welfare is at stake. To end the crisis declare a six month suspension of foreclosures caused by late payments of ARMs after their rates reset, change the terms of existing subprime ARMs by fiat, and legislate reasonable limits on the terms of future ARMs. The existing ARMs should be reset to a rate that is the lower of either 1.5% over the original start rate, or 8.5%, and that should be fixed for three years. The margin would be changed to 4%. Future adjustments would be limited to 2% initial, 0.5% every six months, or 1% per year, 5% total, and the rate should be limited to 8.5% during the first year of adjustment. Payments already made since the first rate reset in excess of the newly limited rate should be credited to either principal or to future interest payments, allowing the borrower payment holidays until the next regualr payment is due. Future ARMs should be limited to three years minimum fixed rate period if the rate will adjust every six months, or two years if the rate will adjust once per year. Limit initial adjustment to 2%, periodic adjustments to no more than 0.5% per six months or 1% per year, total rate adjustment to 5%. The margin should be limited to 4%. Do not allow interest only payments for loans that have fixed rate periods less than five years. Do not allow prepayment penalties on that expire less than 120 days before the first reset, and have such federal rules or statutes supercede the patchwork quilt of unconstitutional state laws that inhibit interstate commerce. The President could achieve the emergency foreclosure moratorium and contract changes using his existing power to declare an economic emergency. Alternatively, Congress could do the same. Limits on the terms of future ARMs should be put into statute and be administered by the Fed under Reg Z. The foregoing would instantly restore value to the subprime mortgage secuities.