Loan Bailout Is Not Likely To Help Many Homeowners
Professor G. Marcus Cole is quoted in this article in the San Francisco Chronicle about the subprime rate freeze plan announced by the Bush administration last week. Kathleen Pender reports:
The subprime rate freeze plan announced by the Bush administration last week was clearly designed to win votes. I just wonder whose.
The number of people who will meet all the complicated criteria necessary to qualify for a five-year rate freeze on their subprime adjustable-rate mortgage is relatively small. Estimates range from fewer than 100,000 to 600,000 nationwide. To put that in perspective, Oakland has about 400,000 people.
To qualify for the rate freeze, you must have taken out a subprime adjustable-rate mortgage between Jan. 1, 2005, and July 31, 2007. You must be facing your first interest-rate adjustment between Jan. 1, 2008, and July 31, 2010, and the payment increase must be at least 10 percent. Your mortgage must have been sold into a securitized pool of loans. You must be living in the home.
Because the plan is written so narrowly, it might not spur the flood of litigation that some were expecting. Treasury Secretary Henry Paulson said, "The risk of litigation should be manageable." But it also might not help all that many people.
...Even if investors don't sue, they could become less willing to buy loans in the future, and that could make it harder to get mortgages.
G. Marcus Cole, a professor at Stanford Law School, agrees. "There are not likely to be substantial objections from investors" because the plan is voluntary and a small number of loans would be affected, he says.
"It strikes me as more of a rhetorical or political device than a financial device. It provides some type of cover for servicers that want to take that step but need some source of authority," Cole says.
But it also sends the wrong message, Cole says. Two of them, actually.
"It gives a sense that the government ought to be engaged in rescuing borrowers in this particular category. It also conveys the message that foreclosures are a bad thing or unhealthy. Foreclosures are a natural part of market discipline. If you take out the impact of foreclosures you have reduced the stick that stands behind the commitment to pay on the mortgage. I would think this would make the markets nervous. This is very interventionist, even to the extent it's voluntary."