FDIC Chair Suggests Fixing Rates To Solve Mortgage Crisis

Sheila C. Bair, the chair of the FDIC, suggests that lenders “restructure all 2/28 and 3/27 subprime hybrid loans for owner-occupied homes in cases where the borrower has been making timely payments but can’t afford the reset payments. Convert these to fixed-rate loans at the starter rate.”

According to Bair, there are still $300 billion in ARMs set to reset before the end of 2008, so the problem can’t be ignored.

Merrill Lynch estimates that if home prices decline by just 5 percent, a quarter of subprime loans may enter default, resulting in losses of almost $150 billion.

Fix Rates To Save Loans [NYT]
(Photo:woodleywonderworks)

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  1. Canadian Impostor says:

    “Hey responsible people with fixed rate mortgages they could afford from the start: in your face!” – The FDIC

  2. stinerman says:

    Meh.

    It’s not a perfect solution, but it beats the “lets bail out all the rich guys who made bad loans they knew no one would ever be able to pay off” plan that is common during slumps like this.

  3. gorckat says:

    What about deferring the difference between the reset and the starter and paying it with a home equity line of credit as the actual equity builds up ~10 years or w/e down the road? Or did I just create a new source of phantom money beside what the banks already play with…

  4. zero_o says:

    WHAT THAT IS AWFUL SO THE PEOPLE WHO WERE SMART TO BEGIN WITH GET SCREWED!

  5. aghast says:

    @canadian impostor – You took the words right out of my mouth… Apparently, if you want to behave irresponsibly with your financial decisions, make sure that you get as many people as possible to do the same. That way, it will look like it’s the lender’s fault.

    Predatory lending or not, you are still responsible for reading what you sign your name to.

  6. beavis88 says:

    @Canadian Impostor, Zero_O

    None of us who were responsible and went with fixed rate mortgages we could afford are getting screwed. The terms will stay EXACTLY THE SAME. You’re just whining about someone else getting a break you aren’t – even though you don’t even need it. Life isn’t fair. Get over it, you’ll probably benefit from a less crappy economy in general anyway.

  7. gershinator says:

    I can’t afford my mortgage payment due to my expensive crack habit. I’ve been renting out part of my house as a crack den in order to get some more money to pay the mortgage but…I LOVE CRACK!!!

    If the lenders want to do it then good for them as a business decision, but to suggest that lender should lose money because someone is someone is smoking crack and “can’t afford” a mortgage is ridiculous.

  8. MeOhMy says:

    I like it…as long as I get my interest rate kicked down to whatever ridiculous teaser rate they were given, too.

  9. mmcnary says:

    @beavis88: That is an excellent point. The stock market bought into mortgage-backed securities and has suffered a pretty significant loss during this crisis. Stabilizing the housing industry should stabilize the rest of the economy as well.

  10. kylere says:

    I vote, and will vote against any official who acts to alter the normal market forces from slapping these idiots around. I have a flat rate 5.15% mortgage, and I could have had a 3.9%ARM, but I am not a moron. If the economy tanks some as a result, I highly doubt that after 20 years of Bush, Clinton, Bush that anyone will actually notice.

  11. lightaugust says:

    It’s understandable that people who did it “right” with fixed rate mortgages feel they’re entitled to some reward for their responsibility, but some people were legitimately screwed over in this process. My girlfriend (now wife) was led into some terrible financial circumstances by the very people who were supposed to be educating her about the process. Many first time homebuyers (especially here in the California market) were led to believe that bad loans were how you were ‘supposed’ to do it. And people with no idea how the housing market worked were told by realtors and brokers alike how these loans were no-brainers and they’d all be rich, rich, rich by next Tuesday. Pretty much why it’s called predatory lending.

  12. Beerad says:

    @beavis88: Aren’t you getting a bit screwed, though? If it turns out that you could have enjoyed a nice lower ARM rate for a while, then had to deal with a ratcheted-up rate for a short period of time, and finally got your loan reset to a fixed starter rate, than haven’t you lost out by making the “right” choice and always having had a fixed rate?

    You’re not worse off, but it’s irksome to see people who made foolish decisions automatically end up in a better position than you, no?

  13. Chicago7 says:

    Is it true that some of the adjustable rate mortgages go up to 12% after a year or so and then go up to 30% in 3 years or so?

    I don’t see how it could hurt, say, Countrywide to shift these loans to a fixed rate. Otherwise, they are looking at a lot of defaults.

    @Gershinator, Who is smoking crack besides you?

  14. CumaeanSibyl says:

    @beavis88: Yeah, pretty much. We’re fine the way we are right now.

    You know, they keep printing stories about how mortgage lenders steered customers into higher-risk loans, fudged terms, and sometimes lied outright, but nobody here seems to be reading those stories. If you go to three lenders for a quote, and they’re all making a habit of offering crappy loans even to buyers with good numbers, what are you going to do?

    And don’t even get me started on what happens if you’re not white. People of color have always had trouble getting banks to treat them right, but the mortgage industry went above and beyond.

    I’m not saying the speculators in SoCal were innocent victims, necessarily. If you’re trying to make money in real estate, you have to accept the risks. But then you have the folks in the rest of the country who bought houses intending to live in them, and their lenders swore up and down they’d be able to afford it… and lied. Then again, I guess I’m wrong to think that a consumer should be able to trust what a professional says.

  15. nakmario says:

    wow… just wow.

    Perhaps the staff at FDIC is full of people who bought into ARMs…?

    it’s funny how people will always blame the mortgage brokers or the banks or the real estate agents.
    But to get a loan you had to sign off on dozens of documents… if you sign something you don’t completely understand then you ARE A MORON!

    i have no sympathy for these people, part of it comes from the fact that I will not be able to afford a house where i live because people bought into the whole bubble.

    This does nothing but screw those who were responsible with their money or who are too poor to have been able to buy into the unjustifiable bubble.

  16. beavis88 says:

    @beerad

    I’d love nothing more than to see the idiots responsible for this mess hang for it – especially the idiots whose job it was to know better (eg those on the lending side of things). That said, I don’t think any of the idiots on the consumer side are going to end up in better positions than me – we wouldn’t be talking fixing rates if the situation weren’t dire, and the alternative foreclosure/bankruptcy/etc. Sure, I’d love to have a little extra money in my pocket, but at this point I’m willing to deal with it and be more concerned about having a job, having customers with enough money to support the company I work for, etc.

    @cumaensibyl

    I’m a big fan of personal responsibility – so I think anyone who was taken by one of these loans deserves at least a bit of the blame. But as I alluded to in my reply to beerad, I think the people who should have known better are the real villains here. Life is too complicated these days for everyone to know all they should about everything – at some level you have to put your trust in the experts, particularly those experts who you’re paying (like mortgage brokers). The systematic betrayal of that trust by some “professionals” is in a word, disgusting.

  17. yagisencho says:

    I’d prefer to see these foolish (and in some cases greedy) ARM buyers stick with their investments than have the market flooded with foreclosures and financial institutions bailed out by the taxpayers.

    I don’t feel that I’m at a disadvantage in any way by their getting stiffed a little less. I locked into a reasonable fixed rate mortgage six years ago, when houses in this market were 30-40% cheaper to begin with.

  18. protest says:

    @Troy F.:

    in the article it mentioned the “teaser” rate was 7%, that then jacked up to 12% and then even higher down the road. i agree that the consumers are idiots for thinking that 12% in 2 years is any kind of a deal, but seriously 7% as a teaser?? that just sucks all around, i mean if you really want your rate set to that, go ahead but i think for most of us that is more than what we are paying on our fixed rates.

    a better solution to this problem is to not offer arm’s at all, there truly is no good thing about them.

  19. wezelboy says:

    What about those of us who cannot afford to buy a house in a hyper-inflated market primarily driven by easy credit? When do we get to buy into the american dream?

    If there is any kind of bailout, I’m afraid we will never see housing return to realistic levels.

  20. Anonymously says:

    I’ve had the same idea for a while now. This idea seems so intuitive that I assume there’s some major flaw with it that I’m not seeing. So, what’s the downside to this?

  21. davidc says:

    So the FDIC is saying to give the consumers the “teaser” rate they started with? Surely this person was on drugs before making that statement / recommendation.

    “Teaser” rates are the extra bonus you get for shifting your consumer dollars to a new (or another) company … the new company takes a loss for a short amount of time and then makes money on the back end. Perfectly acceptable.

    Take credit card “balance” transfer offers. “Zero Interest rate” for the first 3 months … Ooops … Along comes the FDIC and says: Make that teaser rate permanent!!!

    Why? Cause all the people spent all their monies and they don’t have any monies left and they are poor and you are all big meanies!!!

    People going bankrupt is just another form of Natural Selection … it’s a fine system … leave it alone.

  22. Sudonum says:

    According to the post, you have to be living in the house, and able to make the current payment. Speculators who bought property to flip won’t be eligible. And to make it a little fairer to the lenders, put a prepayment penalty in there so that they have to stay with the lender at least until the lender re-coups his costs, or it is taken out of the homeowners profit (if any) when they sell.

    And to those of you saying that the “professionals” should have known better, a lot of them were drinking the koolade too. My brother was a broker and he thought it was going to go on forever. That you’d always be able to refinance to get into a teaser rate, just churn your mortgage every few years. Didn’t matter if you were paying more loan fees What a maroon.

  23. vex says:

    I knew I should have taken that low interest ARM! I could have had a super-low rate fixed for me by Uncle Sam. Now I’m stuck with this lousy prime rate. Grr…oh well.

  24. InThrees says:

    Let’s see… let the mortgages roll over to something some huge portion of the homeowners can’t pay, lost the mortgage, write off another zillion dollars… or refi down to something they HAVE been paying, keep a lot more of the mortgages healthy and active (and paying/paid)…

    Nope, takes too many years of college.

    Really, the big downside to this plan is that it requires a boardroom full of executives to actually make a potentially scary decision, and on their own heads be it. That really doesn’t happen too often nowadays.

  25. mr.dandy says:

    We were “smart” and got the fixed rate. So on the one hand, I am a bit miffed that this thing is going to bail out irresponsible buyers. But on the other hand, mass defaults are making homes lose value, mine included. Also, maybe the lenders should have to take some of the rap considering how hard they pushed these crazy mortgages, without confirming the borrowers’ incomes.

    My thinking is there should be a medium solution where the rates are increased but not by as much– slow down the defaults, and split the burden between the irresponsible lenders and buyers.

  26. sburnap42 says:

    It was really bad. When I last refinanced I got in an argument with one of these idiots because he kept insisting we talk about how much of a payment I could afford and had to be badgered into giving me the rates for different fixed rate plans. He kept hitting me with “what payment are you looking far”, as if this had much bearing on a 30 year decision.

    Still, I don’t think people ought to get “teaser” rates turned into fixeds. Perhaps a reasonable compromise would be to simply cap the rates at around with a fixed rate loan goes for now.

    Honestly, there should be interest rate caps for all loans (especially credit cards.) Lenders would think twice about funding risky loans if they couldn’t jack up the rate to 30%.

  27. lightaugust says:

    So saying that those of us stuck in this situation are somehow fortunate because someone proposes a solution (which will never happen) isn’t that far off from infamously suggesting that poor people are ‘lucky duckies’ since they don’t have to pay taxes. You’re on a fixed- congratulations, you’re right, the rest of us can eat it!

    Of course, you’re probably not worried about losing your house next month, or this fall, or whenever. And you’re right, that can really cloud your vision. Just do me this favor- next time you go to return something to a store that didn’t do what it was promised to do, I’d ask that you stop, blame yourself for being a bad consumer, then hop on over to customer service. OK?

  28. jld says:

    I think they should reset/fix these people’s rates at the current going rate for 30year fixed… say 6.5-7%. If they can’t afford to make payments at that rate, they shouldn’t be owning a house anyway. Cheap and accessible credit is what caused this housing bubble in the first place. The fair thing is to try to adjust the housing market back to where it should have been, even if that means people get foreclosed on. An over inflated economy is not a healthy one.

  29. SadSam says:

    If you read the article, the author is suggesting that teaser rates of 7%+ be fixed and notes that those rates are above prime. I have no problem with above prime rate teaser rates being fixed. However, anyone who has had the benefit of 0%, 1%, 2%, 3% etc. for the last 2-5 years has been paying below market rates and does not now deserve a bail out. Those that can prove fraud by the mortgage company (forged signatures and other switcheroos) have my sympathy and do deserve assistance. However, fraud does not equal didn’t do any research and didn’t know what an ARM was scenarios.

  30. iamme99 says:

    Existing mortgage loan restructuring is very unlikely to happen. One of the reasons is that mortgages are not held by individual banks any longer. Mortgages are broken up, bundled into big groups and sold to investors as a complete package. You can’t take individual mortgages out of the package and change them without affecting the overall package.

    Below is an excerpt from a blog post on the subject:

    [www.nakedcapitalism.com]
    ———————————
    “But that’s actually a minor problem, believe it or not. The real problem is that there is absolutely no way that her proposal could possibly be acted upon.

    The reason is simple. Mortgage servicers have no obligation to borrowers. Zero. Zip. Nada. They are the agents of the investors (technically, the agreement is with the legal entity that holds the mortgages). The only basis for them to do a loan modification is first, if it is permitted by the trust indenture (many restrict “loss mitigation” mods, the kind that help borrowers) and second, only if it appears likely to improve returns to the investors.

    If a borrower is having trouble, modifying a loan may merely serve to forestall the inevitable. And in a deteriorating housing market, delay means a foreclosure sale at a lower price.”
    ————————————

    Additionally, from a legal standpoint, there is no way that anyone could be forced to do this.

    Here’s another link to another story in the same blog again elaborating on why this will never and can never happen.
    [www.nakedcapitalism.com]

  31. iamme99 says:

    The complaining and stories about people being mislead by complex paperwork elicit no sympathy from me. When you sign contracts there is almost always a statement to the effect that you have read and that you understand what you are signing. It is YOUR job to fully understand what you sign or face the consequences for not doing so. If you are not smart enough to understand every aspect contracts on your own, then you shouldn’t be signing them. Go hire a damm lawyer.

    And at this link, a study has shown that 30-70% of mortgage defaults involved some amount of misrepresentation (in English – LYING) on the mortgage loan!
    [efinancedirectory.com]

  32. ArtDonovansLoveChild. says:

    @beavis88: People with fixed rates are “getting screwed”. Arms are anywhere from .5% to 1.25% lower then the fixed rate that an identical borrower could get. So the borrowers who paid a little more up during the first few years are in fact getting “screwed”. They paid more up front, and now, thanks to a tougher lending environment and declining home values, are actually in a worst position then many of the arm-borrowers, who have paid far less, and are going to be able to continue to if this comes to pass. Responsible borrowers are supposed to be rewarded.

  33. ArtDonovansLoveChild. says:

    @sburnap42: Also, there are caps on every loan. No one’s mortgage went to 30%. At most arms go up 2% a year to a 6% max, except for the interest only or teaser rate products down at <3%. The big batch of these forclosures arent Arms anyway, but instead are interest only arms with a 3-5 year period. The payments are jumping so dramatically cause people didnt pay any principle off on thier mortgages, and now have a SHORTER term to pay off the original amount, and have seen payments jump 40% or more in many cases.

  34. mac-phisto says:

    i really don’t understand why so many people in trad. fixed rate loans are so against helping people with non-traditional vehicles. if you’re paying your loan on time & building equity in your home, shouldn’t you be in favor of plans that would help to protect that equity?

    in the toughest markets with the highest rates of foreclosure, even people in traditional loans could become upside-down in their loans. what’s the saying…’would you cut off your nose to spite your face?’

    will your smugness keep you company when you find out that the $50,000 you built up in equity over 10 years of on-time, fixed loan payments evaporated b/c of “all those irresponsible fools”? what if we made all the ARM buyers knock on all the doors of their fixed rate neighbors, declare that they are ARM offenders & bow before the responsible buyers…would that satisfy your thirst for recognition of responsibility in complex mortgage lending practices?

    of all the ideas i’ve heard so far, this one seems to be the most logical of all. which is to say, it’ll happen when swine beat wings.

  35. backbroken says:

    Personal responsiwhatnow?

    Never heard of it.

  36. beavis88 says:

    @ ARTDONOVANSLOVECHILD

    And guess what happens when a load of people default on their mortgages and the market is flooded with foreclosure properties for sale? Oh yeah, the value of your home is going to decline even faster.

  37. Buckus says:

    On the one hand, I’d love to see these banks and buyers reaping what they sow. If they thought interest rates would stay low forever, they were smoking crack.

    On the other hand, I’d hate to see the economy slide into some kind of ultra-depression because of this, with upscale neighborhoods looking like ghost towns.

  38. thomas_callahan says:

    I agree that this does bail out people who made bad decisions, regardless of why they made those decisions (predatory lending, living beyond your means, whatever), but I don’t see it as somehow “screwing” me because if the economy and housing prices tank as badly as it looks like they will, I’ll get screwed anyway. I’m not going to sit here and scream “No fair! I had that low rate first!” like a two-year-old.

    Responsible mortgage, emergency fund, or not — with two kids and one income, if I lose my job or have to take a pay cut or whatever because the economy sucks, I’m going to be in rough shape in short order. Nothing would be more welcome to me right now than a little more economic stability (or at least a little less “oh-god-please-not-another-depression!”) and if this helps do that, by all means.

  39. It’s understandable that people who did it “right” with fixed rate mortgages feel they’re entitled to some reward for their responsibility…

    @lightaugust: Well, I’ve never been in jail and I didn’t drop out of high school or get pregnant when I was a teenager. Should I feel entitled to a new car?

  40. forever_knight says:

    @beavis88: the responsible are “enablers”, by supporting this stupid scheme to bail out the idiots. let the arms reset and the economy tank. i have my 3 year supply of BEANS just waiting to be eaten…

  41. Timewalker says:

    I say cap the interest rate at a current fixed rate, but extend the term to 35 or 40 years to establish a bit of fairness. Yeah, they screwed up, and got a few years with really low payments. Now they can pay the same amount we are paying, but for a little longer.
    Anyone? Anyone? Bueller?

  42. JeffM says:

    What is the motivation for the fixing the rate? How can you “lose” a house you put no money down on? Every understand when they agree to something (be it a EULA or a $500K ARM) that they have signed on to certain terms. Of course brokers peddled these products – I would seriously (and did seriously) question the advice of someone that tells me that I should spend 50% of my gross income on a home loan. That is not sound advice, and if you’re taking your advice from shills that is just another fine example of caveat emptor.

    I see a few people worried about housing prices going down… did you freak out when they were going up 10-20% a year? Why are people so obsessed with high housing prices? Do you enjoy looking in Quicken and seeing an inflated illiquid net worth? High housing prices generally hurt everyone except down-sizers and retirees. (Save municipalities collecting your bloated income tax bill)

    As someone who graduated in college in 2005 I militantly oppose any manner of bail-out since it interferes with a free market and is one of the only hopes to bring home prices back down to be somewhat in-line with an acceptable multiple of rent (assuming a standard 30 year mortgage). In the mean time… a proud renter I am!

  43. CumaeanSibyl says:

    @Rectilinear Propagation: Yes. And I did all the same things PLUS graduated from college and got a fixed-rate mortgage, so I want a pony.

  44. Meh. They signed the papers, their problem, not mine. I’m looking forward to prices coming down so that I can get more house for my money.