Deal Will Let Some Borrowers Keep Current Interest Rates

Countrywide, G.M.A.C., Litton and HomeEq have agreed to let many potentially distressed borrowers in California keep the initial low rates of their ARM home loans, says the New York Times. California is the epicenter of the subprime meltdown, with foreclosure rates that are always near the top of the list (along with Ohio, Michigan, Nevada and Florida).

Here are the details:

A Schwarzenegger aide, Sabrina Lockhart, said the governor’s office negotiated an agreement with the Countrywide Financial Corporation, G.M.A.C., Litton Loan Servicing and the HomeEq Servicing Corporation that would allow the lenders’ mortgage borrowers in California to continue paying loans at initial rates if they live in their homes and make payments on time but are unlikely to afford higher payments when their mortgage interest rates are reset.

Governor Schwarzenegger’s office estimates 500,000 Californians hold subprime mortgages whose rates will reset at higher levels over the next two years.

Ms. Lockhart said that the governor wanted the agreement, based on a proposal by the Federal Deposit Insurance Corporation chairwoman, Sheila C. Bair, to stand for five years, but said that how long it stays in effect at each company would depend on individual circumstances.

What do you think of this? Should troubled ARM borrowers get to keep their teaser rates? Will this stop the foreclosure tsunami? Is it too late?

Deal Will Let Some Borrowers Keep Low Rates [NYT]
(Photo:Jeremy Brooks)

Comments

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  1. esqdork says:

    It’s one thing if the borrowewr was outright lied to, but in most cases, these distressed borrowers knew (or should have known) exactly what they were getting themselves into when they signed the loan documents. Indeed, I know several borrowers a few years ago talking about how smart they were because property values would only go up and that they could refinance before the rates reset. By giving the borrowers a break, all that is being done is to encourage more poor financial decisions down the road becuase the thinking will be: “Oh, if it gets really bad, the government will bail us out, and if property values go up, we can refinance and make money.” At the end of the day, people should not buy homes (or cars, cell phones, computers or anything else) that they cannot afford. My position is the same for the lenders who are also hoping for government help–if you made the risky loan, you should assume the consequences of the risk. .

  2. cabalist says:

    Sorry, but NO.

    I do not think that is is a good idea to change their ARMs into fixed-rate mortgages at the same, ARM, rate. That encourages behavior that is dangerous on a personal and financial level as well as a societal level. This behavior says to a great many people, “no matter what decision I make I will be bailed out–ergo there is no reason for due diligence.” I think that this is a bad–even damaging message–to send to millions of Americans and businesses.

    About the fairest thing to do, if there is a fairest option, is to note the closing date on each individual ARM and go back to the appropriate interest rate available (maybe an average of all rates or some percentage above a government issued rate) on that date. Then, I think that an additional percentage would need to be added to that rate to arrive at the final adjusted-ARM rate (FAARMR–pronounced ‘farmer’).

    Now, how to punish the lenders for their predatory lending practices…hopefully in a manner that can help this ‘consumer bailout’. Better a consumer bailout than a corporate bailout at least.

    Richard

  3. davere says:

    So I don’t get any perks because I was smart enough to get a fix 30-year loan? Bah.

    OK, apparently I was not THAT smart after all.

  4. imthinkingwait says:

    Thats great Arnold. Reward everyone that bought a house they couldn’t afford and punish the ones that saved up for a house. Let the market correct. Hard.

  5. timmaah says:

    What a joke…

    Hey countrywide.. what do you say we agree to put just a bit more of that interest towards my principle? No? then why the hell do it for these people?

  6. goller321 says:

    I have to agree with the previous posters. Many of these people knew exactly what they were doing. I say let them be foreclosed on and then the market in California will start adjusting to itself to a more reasonable market. I would agree that a good idea is to let the borrow set themselves at a fixed rate appreciable to what they could have gotten at the time, with penalties assessed. I don’t think the penalties should go to the lender though as they were as much, if not more to blame. Slap both the borrower and the lender with fees associated with fixing this entire mess, and compensating the prudent borrowers that did not buy into this whole fiasco.

  7. The_Truth says:

    Thats awesome! So Im going to keep my low low intrest rate on my ARM and not have to deal with the huge upcoming payments that I could so clearly read about from my contract and continue to live in a house that is beyond my means? Awesome!

    Oh wait, its not, because I got a 30yr fixed, because I READ THE DAMN CONTRACT, and understood exactly what it meant!

    I listened to the 1st lender as he was explaining the ARM and the refi in a few years and said, I quote:

    “Thats stupid. Any idiot can see house prices cant keep going up at this rate, in fact the new build house I’m buying is already 50K lower than the surrounding houses. Plus what about refi fees? and this minimum payment and the associate negative amortization means at the reset mark if I cant get refi’ed for whatever reason Im screwed right?”

    After that we went and found an alternative lender.

    Why should I be punished for making an intelligent buying decision, punished for actually reading my contract and understanding what it said (You dont have to be a lawyer to understand a contract) and punished for agreeing that yes a 30yr fixed might start off a little higher in the short term but in the long run its much better?

    They made the decision they should have to live with it. No bail-outs, no hand outs, you make a decision, you live with it.

  8. Me - now with more humidity says:

    What a bunch of whiny-ass haters you are! I’m gonna laugh some day when you need help with something as traumatic as losing your home — even by your own error.

    Yes, they should have read their contracts closer and looked down the road at every possible economic scenario that could befall the real estate market, rather than trusting someone they were paying a buttload of money to to “help” them. But not everyone is a brilliant and guiltless and perfect as you all obviously must be.

    How do you get through the door with an ego that big?

  9. SteveBMD says:

    @davere: And I don’t get any perks because I was smart enough to continue renting???

    I agree that this is a bad idea, because buyers should have known what they were getting into. But there’s more. As GOLLER321 pointed out, widespread foreclosure would help the market “reset” to more rational levels. If these buyers are bailed out, not only would it reward irrational behavior, but it would probably keep the market at its current nosebleed levels, and those of us who are trying to be responsible would indeed be priced out of the market forever.

    In the meantime, my stocks are down big over the past week or so, maybe I’ll write my congressman to see if he can help me out.

  10. Skiffer says:

    I think it’s only fair that now Countrywide/GMAC/etc reduce the rates on their fixed loans by the same amount (that the ARMs would have gone up)…

    If the government is gonna bail out the ARMs, the fixed rate crowd should get the same savings…

  11. sleze69 says:

    @Me: “they should have read their contracts closer and looked down the road at every possible economic scenario that could befall the real estate market, rather than trusting someone they were paying a buttload of money to to “help” them”

    Exactly.

  12. DrGirlfriend says:

    @SteveBMD: I agree 100%. House prices need to be realistic again, and not based on how far you can overextend yourself to pay out the nose.

  13. nursetim says:

    As much as it will cause a lot of pain, government should just let this thing play itself out. After a little short term pain, things will be better for everyone in the long term. I have faith our economy will sort itself out, but only if there is no interference from the government. When people look back on this, they will know that everyone should do what they can to prevent a repeat.

  14. JeffM says:

    @Skiffer:
    I absolutely agree with you. That would at least make me feel better- it at least is equitable for those who did the right thing.

  15. Me - now with more humidity says:

    SLEZE69: I agree. But all of this holier-than-thou piling on isn’t helping anyone. Karma’s a bitch — and she’ll bite you hard.

  16. sleze69 says:

    @Me: Actually, Karma isn’t biting the people who took out loans beyond their price range. In fact, Karma appears to be letting it slide.

  17. S_SILVERS says:

    Um, so all the people that had and have a fixed-rate mortgage (i.e. those that didn’t cause this problem), are now going to be paying higher rates than the idiots who got us into this mess, now that the ARMs are going to be converted to fixed at the teaser rates?

    Explain to me again why anyone should save, or be prudent with their money.

    So, now that all these “poor, poor, victims” have no reason to pay their credit card bills. I mean, after all, wont someone just bail them out as well?

    Heck, while they’re at it, why dont they finance that luxury car they cant afford. No worries.

    Seriously, what’s the incentive to save anymore?

  18. iamme99 says:

    Greedy or impatient people who put themselves in the middle of this problem because they thought they HAD to buy now/then regardless of cost or common sense deserve to pay the penalty for their choice. I have no sympathy for dumb or stupid people.

    Now THAT’S Karma. Also referred to as “What goes around, comes around”.

  19. DrGirlfriend says:

    I don’t think it’s a pile-on. I think people are frustrated. Speaking for myself, I don’t take any *joy* in people losing their homes. But do I feel like people who took the irresponsible approach helped make it harder, if not impossible, for the rest of us to be owners? I do. And do I find it frustrating that they are being bailed out? I do. As was mentioned above, unless they were flat-out lied to, it’s not fair to allow people to be irresponsible, affect others with their irresponsibility, and then be, essentially, rewarded. And if foreclosures on these homes will help bring back house prices to reasonable levels so that *more* people can afford homes, then, from where I stand, I don’t think that’s going to affect my karma.

  20. jld says:

    I agree that this is a situation where the free market should play out. People made mistakes and can go back to renting, which is not the end of the world. The free market (Poor lending and borrowing practices) has made housing more expensive for all of us, and we should let the free market (foreclosures and defaulted mortgages) to return us back to where we should have been. Lots of people made a buttload of money flipping houses, which means somebody’s gotta pay.

  21. headon says:

    I feel sorry for all of you who took out a fair priced fixed rate mortgage. Looks like I get to pay the 1% teaser rate. Score one for the dummies like me. Yo baby SNAP!!!!!!!

  22. szeno says:

    This is not a bail out, the government’s money is not involved. If the mortgage companies agree to it, it must be in their interest to do so. So this is free market doing its part. It is like short sell of a house, banks allow some borrowers to do so because it is in their interest to do so.

    Also, we don’t know the detail yet. It only mentioned that the browsers can pay the current amount for another five years, banks may put the difference between ARM interest rate and current market interest rate into the principal, so making the mortgage amount getting bigger. Borrowers may be able to refinance after 5 years if the house market rebound.

  23. esqdork says:

    @Me: “I’m going to laugh some day when you need help with something as traumatic as losing your home[.]”

    “Karma,” according to Wikipedia in relevant part: “simply deals with what is. The effects of all deeds actively create past, present and future experiences, thus making one responsible for one’s own life[.]”

    Note the emphasis on being responsible for one’s own life.

  24. QuantumRiff says:

    Good god, I paid 6.5% on my 30 year fixed, because I didn’t want the 4%/Adjustable.. So Can I cry and whine and get a 4% rate? or do I just get punished for being smart?

  25. Sudonum says:

    Those of you who bought a home using a 30 year fixed, congratulations, you made the right move for this market. But complaining that this is a bail out is wrong. If anything you should be rejoicing because this is also helping you. What happens if your neighbor, who wasn’t as diligent as you, looses his/her house? The bank takes over, doesn’t do any maintenance, cut the grass, etc. Within a few months you have a blight next door. Now consider if you have 2 or 3 of these on your street? Several more in your subdivision/neighborhood? What is that going to do to your property values? This is already happening in many communities in Ohio and Las Vegas.

    And if you think there aren’t any consequences for these people you’re wrong. The fact that the lender had to renegotiate this loan will affect their credit for many years to come. Almost as bad as a foreclosure or a bankruptcy.

  26. mac-phisto says:

    wow. a lot of me, me, me’s here. ok, that’s healthy. that’s american. let’s take a step back for a moment. in terms of housing, everybody fits into 1 of 5 categories:
    1) rent
    2) own
    3) live in parents’ basement
    4) homeless
    5) jail/prison

    helping ARM borrowers avoid foreclosure b/c of a reset benefits all of those categories in the following ways:
    1) rents stay low b/c demand stays roughly the same. high demand = a note from the landlord telling you to pay an extra $400/mo. or leave the keys.
    2) equity on all homes stays roughly the same b/c the market does not become flooded. if you’re in a fixed-rate, you should support this (unless you like losing money).
    3) ok, this really doesn’t affect you, unless your parents have an ARM, in which case they won’t tape an eviction notice to your tv.
    4) it sucks to be homeless. it would suck more if the homeless population quadrupled & you had to start shivving people to keep your bed at the shelter.
    5) crimes rates correlate to poverty rates. more poor/homeless people means more crime, which means more inmates, which means you might be sharing that orange jumpsuit soon.

    conversely, NOT helping ARM buyers helps:

    it’s alright to be selfish, but biting off your own nose to spite your face is just stupid. i don’t see how booting 10 million people out of their homes benefits anyone (except the landlords).

  27. TheNomad says:

    GMAC is a bunch of crooks, gotten together to figure out how they can screw you even deeper everyday. Why you ask ? Well let me tell you. I am the holder of one of these, so-called, subprime mortgages. Not that I needed such a mortgage at the time, but due to quick closing of my newly built home, I went with my builder’s loan company (K-Hovnanian Loans, another bunch of crooks in my opinion) and accepted whatever they said. Because, changing anything required triplicate paper work and extending the closing. I was in a bit of a time crunch with my expiring lease and everything, so I said, I will deal with this later and signed the papers. Afeter about a month, Countrywide acquired my paper from hovnanian loans which in 4 month’s time or so sold it to GMAC. This month of november is my last month in the 2 years fixed period and GMAC crooks did not miss the chance of jacking up my monthly payment from $2800 to almost $3700.

    I said, it is time to re-fi and gave them the first dibs. The loan crook over the phone gave me the estimate of the value of my house much less than what it is actually worth and try to lock me in with 7.5% interest rate in a 30 year fixed scenario, because my loan to value ratio has not improved. As a matter of fact it seems it devaluated by a few thousand dollars since 2005.

    Now I am in the talks with BoA mortgage and got a 6.25% rate from them, hoping to close within 2 weeks. Good riddance GMAC crooks.

  28. goodbadandugly says:

    I always enjoy the multitude who come and attack borrowers because they knew what they were doing and go in this mess through their own ignorance or fraud. Of course, this forgets that most us rarely know exactly the terms we are agreeing to in a car loan, mortgage, or credit card agreement. I’m not saying its right, only pointing out not to throw stones in glass houses (BTW, I think you can get an interest-only no-doc loan on a glass house).

    Furthermore, the message pimped by government at all levels and industry over the last five years was “do whatever it takes to get into a home now, or you are a worthless member of society.” While it is easy to dismiss this pressure and rhetoric as nothing but propaganda, the truth is that propaganda works. The Federal government told people that their number one goal should be to get into a house, refinance a home, or just spend, spend, spend. So at the least government has a responsibility to respond.

    These sort of large-scale workout agreements have been formed in such a way as to avoid helping speculators in the market. If the home is not your primary residence, or you own multiple properties and you claim them all as primary residences, these programs will exclude you right from the start.

    Finally, while we could just dismiss this and say “oh well, this will bring housing prices down to realistic levels” that sort thinking misses a larger economic picture. Each home in foreclosure within your zip code lowers your existing property values but almost 1%, the municipal cost per foreclosure has been estimated at $30,000. Letting this process “run its course” could run our economy into the ground.

  29. iamme99 says:

    The plan to save ARM holders in over their heads in California isn’t going to work anyway, so this discussion doesn’t much matter anyway. Those who bet the farm foolishly will wind up paying.

    See:
    [globaleconomicanalysis.blogspot.com]

    Sadly, even those who have fixed loans will suffer if they brought in the last 3 years or so and find that they need to sell their house. Why? Because the continual escalation of foreclosures and the problems in the credit market WILL drive down the price of homes, perhaps by 50% or more over the next few years. Point of reference, Japanese real estate lost 85% of it’s value since 1990 (25% since 2001).

    What if you paid 500k for your house and put 20% down (so you now own in the neighborhood of 400k). But if your house value declines to say 250k and you have to sell (say due to job loss, medical emergency or some other reason), what will you do? You will have to take the loss. Or even if you don’t have to sell, will you continue to pay your mortgage, valued at 400k now, if your house is worth only $250k?

    Some owners are already in this quagmire. They brought their new house from a build earlier this year and paid high for it. Now the builder is selling their remaining inventory with cuts of $100k-400k or even auctioning the inventory for whatever they can get. So these people are suffering a loss right now.

  30. esqdork says:

    @mac-phisto: Here’s the flaw in your logic and the thinking that get so many people into trouble in the first place. Your primary home is first and foremost supposed to be your shelter–it is not supposed to be an investment in the traditional sense like stocks, bonds, money market accounts, or your cousin’s web start-up. Assuming that your home is an investment, like any other investment, you should expect that there is a risk you will lose money. Ignoring that investing truism and expecting to make money on your house contributes to some dumb-ass risk-taking like financing or refinancing your house on a 5:1 negative amortization ARM and teaser rate with the expectation that your “investment” will appreciate faster than the debt you are accruing. Appreciation in the home value of my house is only beneficial at the time of resale, otherwise, it only acts to increase my property taxes.

    The appreciation in home values during the last 5-10 years has helped people who sold during that time but it has also created a situation where many people could not afford to become first-time homebuyers leading to one of two things: lack of home ownership for many and other people getting themselves overleveraged to get on the bandwagon. Locking the interest rates for people who lost their gamble on home prices only perpetuates this problem.

    I’m not saying that I’m smarter than everyone else, just more risk-adverse. This means that I’m not worried about an interest-rate reset, but it also means that I didn’t make any money off the housing market in the last 10 years. That was my gamble.

  31. Trai_Dep says:

    In those cases where borrowers can prove fraud, rather than not reading the paperwork because they’re “too busy”, start jailing some execs and cut the borrowers some slack. Really, tho – nail the execs to the wall.

    For the rest, consider this a reminder that Reading Is Fundamental. Bonus: a great lesson for the kids – see, stay in school, so you don’t lose your house like your parents did because they were too dumb to read the paperwork.

    It’s SO unfair to people that paid a higher, safer fixed-rate mortgage, otherwise.

  32. mac-phisto says:

    @esqdork: are you responding to the right person?

    i simply stated that a homeowner shouldn’t want their investment to drop in value. there’s no flaw in that logic. sure, people should realize that their investment could lose value, but no investor should be rooting for it.

    some of the folks on here are all, “lose your homes you stupid poor people! nah! nah! i’ve got a fixed rate mortgage!” not realizing that massive foreclosures affect them in many ways.

    the worst being if banks started calling loans due. then it doesn’t matter what type of loan you have…just whether or not you can find one somewhere else.

  33. iamme99 says:

    @MAC-PHISTO: some of the folks on here are all, “lose your homes you stupid poor people! nah! nah! i’ve got a fixed rate mortgage!” not realizing that massive foreclosures affect them in many ways.

    Yeah and that is the problem. Intelligent, responsible people who took the conservative route now need to worry about propping up the risk takers who went out on a limb or they suffer also. Same with the recent FED/Government cartel who feel that some large companies/funds can’t be allowed to fail, no matter what they did/do because it would “hurt the economy” too greatly.

    With this rational, there isn’t any reason not to take chances because it is likely that you WILL be bailed out somehow, someway.

    If banks, mortgage companies, brokers, etc. were sufficiently regulated such that the pain of making the loans they did to the people they did who were not qualified were great enough, then none of this would have happened. I’m talking very serious consequences. Significant jail time in hard prisons and fines that could potentially bankrupt a company. That is all people will understand. Reinforcement is part of learning and examples need to be made on a regular basis or else people forget and do the same things time and again.

    But of course, had we taken such a course, then we would have had slower economic growth, less tax revenues, therefore less money for governments and consumers to spend, higher unemployment (but probably with higher pay for those working), etc., etc. However, we would likely not have to be scrambling around trying to figure out what to do now.

    You’ve only got 10 fingers to close the holes in the dyke. When the 11th hole opens, you’re looking at serious trouble. We’ve got about 20 holes going now!

  34. Trai_Dep says:

    “slower” economic growth = sustainable economic growth.

    Simple truth is that once the Republicans cut the tax rates for the upper 1%, while screwing everyone else, they needed to do something to prop up the economy, since such narrow tax cuts wouldn’t get us out of the Bush recession. Rather the first Bush recession. Err, first Bush II recession. You get the point.

    They had no choice, ideology trumps rationality with these people. Enter the five-card monte economy we’ve had, and the crash that we’re watching unfold.

  35. SteveBMD says:

    @goodbadandugly:

    …this forgets that most us rarely know exactly the terms we are agreeing to in a car loan, mortgage, or credit card agreement.

    But a mortgage on a new home is orders of magnitude larger than an auto loan or a line of credit. I would want to know the terms, or hire a third party to help me understand them.

    … the message pimped by government at all levels and industry over the last five years was “do whatever it takes to get into a home now, or you are a worthless member of society.”

    Only if you let yourself believe you are a worthless member of society. I’m valuable and productive, and I rent.

    …The Federal government told people that their number one goal should be to get into a house, refinance a home, or just spend, spend, spend….

    Nobody told me that my “number one goal” was to spend. What are you smoking??

    …Each home in foreclosure within your zip code lowers your existing property values but almost 1%…

    That doesn’t bother me, I don’t own any property because it’s too absurdly expensive. A few 1% drops would be nice (and would, frankly, make sense).

    …Letting this process “run its course” could run our economy into the ground….

    Finally, a comment from your post I can agree with.

  36. Trai_Dep says:

    What’s the 5-year run-up in homes been in the past six years? 100-150%?

    I’d like to see prices drop 50% or more – basically what a sane appreciation rate would have been. THAT would be rationality returning to the market.

  37. iamme99 says:

    @TRAI_DEP

    So you think a “sane” appreciation rate for housing is 10%/year???? Ha! You are jaded by recent results.

    Historically, housing appreciation has been in the 3-5% rate, depending on where you lived (this is a long-term rate, say 20-40 years). Stocks are typically quoted as 8-10%, which is why people always said that INVESTING in the stock market was better than owning a house. That changed with the bubble that began around 1997 due to Greenspan being the clueless ass that he was. Many of the problems we face today are due to the Greenspan FED turning a blind eye to reality in the quest for ever more economic growth, no matter how we achieved this.

    Here is a chart of housing appreciation by regional area from 1990Q1 – 2007Q2:
    [www.ofheo.gov]