It looks like I am in the process of being proven wrong, but even if I am wrong, it is because I underestimated the stupidity of policymakers and the short-sightedness of the mortgage industry.
In September, Shiela Bair, chairman of the FDIC, had called on mortgage servicers to freeze teaser loans at their introductory rates. I said it wouldn’t happen (it would violate too many servicing agreements) and was a bad idea.
California’s Governor Schwarzenegger has gotten some large servicers to agree to keep their initial charges in place. Whether this is a sincere effort, PR, or convenience (as Michael Shedlock cynically noted, ” Here is the official translation. Countrywide cannot stand another 80,000 REOs”) is yet to be determined.
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…..
The lenders have also agreed to seek out borrowers before their loan terms reset and to improve the process of determining whether borrowers can afford bigger mortgage payments when rates rise, Ms. Lockhart said.
If Jerry Brown had tried something like this, it would have been deemed socialism. The borrowers that can take it will get rate increases, the ones that can’t, won’t.
In theory, this could have simply been window-dressing a program to make more loan mods, which is the sensible way to deal with this problem. It is generally in everyone’s interest to keep the borrower alive if he is at all salvageable, but keeping borrowers going at all costs is damaging not only to the financial institutions but also to the weakest borrowers, who are better off taking their losses rather than compouding them. Countrywide had already announced a program to do so, so the Schwarzenegger agreement isn’t a new undertaking.
However, the comments from the companies confirmed that this program is intended to freeze some (many?) loan terms for five years as stipulated:
Litton Loan President Larry Litton Jr. said a five-year extension of current rates for some borrowers was justified given the housing market’s slump, financial hardship in many households and anxiety among mortgage investors.
“At the end of the day we’re able to align the borrowers’ interests with the investors’ interests, saving everybody money,” Litton said in a telephone interview.
Shedlock again: “This is nonsense of course and has nothing to do with “alignment”. It is a desperation move seeing to stop foreclosures and a buildup of REOs.”
It isn’t clear that these servicers can deliver (the deal was with the Litton and HomeEq servicing entities, and with GMAC and Countrywide). As noted before, they are required under the terms of their contracts to act on behalf of the investors. They have absolutely no obligation to borrowers.
One could argue that the deal the quartet signed in California is an act of bad faith. Investors no doubt will (via counsel) find out how the servicers intend to proceed. Possible outcomes: the investors are persuaded this arrangement is in their best interest; the servicers are browbeaten in private to curtail their activities under the plan (ie, they can take action that conforms with it but only to the extent it clearly helps investors or makes them no worse off); some investors decide to sue. There would probably be some private back-and-forthing to see if the servicers and investors could agree on a protocol before any litigation was filed, so don’t expect any immediate fireworks.