FDIC chairman to Mortgage Co.'s-Freeze ARM's! - Mercedes-Benz Forum

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post #1 of 60 (permalink) Old 10-05-2007, 06:31 PM Thread Starter
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FDIC chairman to Mortgage Co.'s-Freeze ARM's!

I guess you can cure the symptom, but you can't cure the borrower's stupidity with this:

FDIC to mortgage servicers: Freeze ARM rates
Top bank regulator suggests industry cuts losses now to prevent foreclosures.
By Jeanne Sahadi, CNNMoney.com senior writer
October 5 2007: 5:03 PM EDT

NEW YORK (CNNMoney.com) -- The heat on U.S. mortgage lenders and servicers was turned up a few degrees this week when the country's chief bank regulator publicly proposed that they permanently freeze interest rates on subprime adjustable-rate mortgages (ARMs) for many homeowners.

"Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it," Federal Deposit Insurance Corp. Chairman Sheila Bair said in prepared remarks at an investor's conference.
Mortgage Meltdown 2007
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ARMs often have a low introductory interest rate for two or three years and then reset to much higher levels.

Roughly 1.3 million subprime ARMs are due for a rate reset between now and the end of 2008, according to data from First American Loan Performance.

Bair proposed that servicers convert only those ARMs that haven't reset yet and only for borrowers who are current in their payments and occupy their homes. Loans taken out by speculators who don't live in the homes they bought would not qualify for the automatic conversion.

Consumer advocates have also been calling on lenders and servicers to modify subprime mortgages to make the payments affordable for homeowners who would struggle to keep the house once their rates reset. But rate reductions, while they do happen in some cases, are far from widespread, they say.

"We can't just sit here doing this kind of case-by-case, laborious restructuring process with all these millions of subprime hybrid ARMs," Bair said, citing a recent Moody's survey, which found that less than 1 percent of problem subprime ARMs were being restructured.

"[Bair's recommendation] is exactly what's needed," said Michael Shea, executive director of ACORN Housing, which has offices around the country where counselors have been working with troubled homeowners to renegotiate their subprime mortgages with servicers.

Mortgage servicers - those that administer and collect payments on the loans - may be restricted by the terms of their pool servicing agreements (PSAs), which are their contracts with the investors who own the loans being serviced. Those contracts may specify when and how many loans may be modified.

But the servicer typically does have discretion when a loan has become or is likely to become delinquent. And investors are unlikely to object if the servicer can make the case why a modification will lose less money than a foreclosure, said William Rinehart, vice president and chief risk officer of Ocwen, a loan servicer that administers 470,000 loans.

And in many instances, foreclosures can create bigger losses for investors. "[E]ffective restructuring can preserve credit support [and] reduce credit losses," Bair told the investor conference.

If servicers acted on Bair's suggestion verbatim, "you'd likely have a backlash, particularly from your senior investors," said Larry Litton, president of Litton Loan Servicing, which has been proactive about contacting borrowers before their rates reset and modifying their loans in instances where a rate reset would make the home unaffordable for them.

The message Litton thinks the industry will take away from Bair's proposal is "you have to do a better job of fixing loans that are fixable. And if you don't do it, someone else will do it for you," he said, noting, for instance, that a proposal on the Hill to let bankruptcy judges reduce the mortgages of borrowers filing for Chapter 13 would not go over big with the industry.

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post #2 of 60 (permalink) Old 10-05-2007, 07:10 PM
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Sometimes, if you bear arms, you may find yourself in the cooler, or they may put you "on ice" and then all of you can chill, although you probably won't freeze until "Bubba" calls your name...

Conversely, depending on the weather, if you bare arms, they may freeze themselves without any outside influence...

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post #3 of 60 (permalink) Old 10-05-2007, 07:15 PM
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Sounds almost like wage and price controls, except that she's just "suggesting" it for now. How nice to get contracts changed whenever you change your mind about them...
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post #4 of 60 (permalink) Old 10-05-2007, 07:17 PM Thread Starter
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Quote:
Originally Posted by gregs210 View Post
Sometimes, if you bear arms, you may find yourself in the cooler, or they may put you "on ice" and then all of you can chill, although you probably won't freeze until "Bubba" calls your name...

Conversely, depending on the weather, if you bare arms, they may freeze themselves without any outside influence...
I think that Bairs repeating . . .

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post #5 of 60 (permalink) Old 10-05-2007, 07:30 PM
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Sounds almost like wage and price controls, except that she's just "suggesting" it for now. How nice to get contracts changed whenever you change your mind about them...
If only a few borrowers were affected, I would agree completely but two other issues play very heavily into this equation.

First, many banks, mortgage houses and sub-prime lenders exercised very poor lending judgment in efforts inflate their mortgage portfolios which were being then converted to collateral for highly leveraged hedge funds and derivatives. This need to sell as much paper as possible meant that many lenders failed to provide adequate information on the increases to borrowers and also failed to determine the impact on the borrowers cash flow at the higher interest levels. Initial lenders did not care as the mortgage would be resold before the rates changed and they would not see the enhanced liability.

Second, with the quantity of foreclosures caused by both sloppy lending practices [many illegal in many states] and undisciplined borrowers, the impending collapse of the financial sector and the collateral collapse of international hedge/derivatives funds [in the $100TRILLION+ range] would have the effect of putting much of the financial world in a recession or depression.

Sometimes, controls are a necessary evil after years of undisciplined fiscal policy.

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post #6 of 60 (permalink) Old 10-05-2007, 07:38 PM
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Now, you don't really mean 100 trillion, do you? Meanwhile, 'controls' which reward irresponsible behavior (and that includes irresponsible investors) are pernicious in that they distort the market and generally cause more irresponsible behavior in the future.

Separately, I have noticed that if you want to screw up, do it in a noteworthy fashion. People whose houses have flooded don't get public assistance unless they're part of a major event. Then they get free houses. Is that fair?
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post #7 of 60 (permalink) Old 10-05-2007, 08:30 PM
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Now, you don't really mean 100 trillion, do you? Meanwhile, 'controls' which reward irresponsible behavior (and that includes irresponsible investors) are pernicious in that they distort the market and generally cause more irresponsible behavior in the future.

Separately, I have noticed that if you want to screw up, do it in a noteworthy fashion. People whose houses have flooded don't get public assistance unless they're part of a major event. Then they get free houses. Is that fair?
Yes, I do mean $100 Trillion. The International Monetary Fund [img.org]estimates the current global Hedge/Derivatives funds to be capitalized at $10TrillionUS. When the LEVERAGING of these instruments starts being factored in [estimates of up to 38:1] the conservative 10:1 puts the at risk active worldwide Hedge/derivatives market which is heavily loaded with US mortgage paper near the $100Trillion number.

While the percentage of ACTUAL mortgage paper involved in the leveraged Hedge/derivatives market is not high, the bundling within portfolios means that the impacts of a collapsed mortgage market has a direct impact on the world's market.

You say that controls distort the market. YES! That is their sole task. But you are assuming that the market is otherwise free, which is far from true. Just this past six months the FED has poured over $400Billion into the financial sector to relieve pressure for this problem. They further dropped the Prime 1/2 point. Other World Banks have done the same [in fact they requested our FED to act].

I have been banging this SubPrime drum for two years. I think it is dumb to reward poor lending behavior HOWEVER that train has left the station. We now have a choice of fixing the problem with Federal money or watching the financial sector follow the housing sector into total collapse. Durable goods will follow that. IF we had strong FISCAL POLICY over the past six years, this could have been avoided but instead we tried to CHARGE ourselves into prosperity and it FAILED. Now we have an additional $5Trillion in National Debt AND a Housing/Mortgage market in ruins.

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post #8 of 60 (permalink) Old 10-05-2007, 08:35 PM
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Separately, I have noticed that if you want to screw up, do it in a noteworthy fashion. People whose houses have flooded don't get public assistance unless they're part of a major event. Then they get free houses. Is that fair?
You have had your whole world turned upside down, all you possessions lost, your saving will be depleted trying to get caught up, your government will be late at whatever they promise you and likely as not you are pretty much all alone to deal with everything by yourself AND still try to work and earn a living [assuming work did not also flood out].

FAIR is out back sniffing glue. Folks who have had this kind of shit need a fucking break.

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post #9 of 60 (permalink) Old 10-05-2007, 08:39 PM
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We now have a choice of fixing the problem with Federal money or watching the financial sector follow the housing sector into total collapse.
The financial sector should follow the housing sector, but it's retrenchment, hardly 'total collapse'. If you look at the stats, many housing metrics have returned to their levels of the 1990s. That's hardly a total collapse.

Priming the pump, while it rewards investors, merely delays and hence intensified the eventual reckoning. Our national debt overhang, both public and private, isn't going away until and unless we tighten our belts and begin to practice fiscal discipline. Throwing more 'money' at the problem actually makes things worse in the long run. You'll notice that internationally, the dollar has become a pariah. And you probably know why I put 'money' in quotes there.

Incidentally, I do not assume that the market is 'otherwise free'; it's clearly meddled with in all sorts of ways. Further, do not assume that I am opposed to government controls just because I think this latest move is unfortunate.
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post #10 of 60 (permalink) Old 10-05-2007, 08:42 PM
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You have had your whole world turned upside down, all you possessions lost, your saving will be depleted trying to get caught up, your government will be late at whatever they promise you and likely as not you are pretty much all alone to deal with everything by yourself AND still try to work and earn a living [assuming work did not also flood out].

FAIR is out back sniffing glue. Folks who have had this kind of shit need a fucking break.
I think you missed my point. My point is that what you describe is just as true of someone who lost their house to flooding that didn't make the news (or the government handouts). If we're going to help people out, we should do it responsibly, and equitably, not just wherever there's a media event or political photo-op.
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