Yesterday, we posted some thoughts about the subprime rescue plan under development among the Treasury, some leading servicers, other regulators, and some investors (most notably Freddie and Fannie). A few additional items:
We had commented that the plan would be limited to only borrowers who were current on payments. That appears to be incorrect, or at least up in the air. Other reports indicate that borrowers would be eligible if they have missed a payment or two. As readers pointed out, that may raise issues of moral hazard, particularly if borrowers believe that tangible proof of their distress would improve their odds of being included.
Also, we had reported that the Wall Street Journal story over the weekend on the plan was largely favorable. However, the online version (the one we read) had the header, “Rate Plan Has Skeptics, Fans.” The print version had the headline, “Some Investors Fault Plan to Aid Home Borrowers.” That puts a different coloration on things.
True to form, the Financial Times coverage was more pointed than that of the Journal:
Several mortgage experts also said catagorising borrowers would be difficult, given that their financial information might never have been collected before. Also, a large percentage of adjustable rate subprime loans have already been sold to investors who would have to accept lower payments as part of the plan.
There could also be political backlash if any final plan did not help the most strapped borrowers. Any plan that did not include such help could face opposition from prominent Democrats including Barney Frank, a representative from Massachusetts, and Charles Schumer, a senator from New York.
Mr Schumer said: “This is the first time that the Bush administration is working towards a solution that meets the magnitude of the problem. But there is a $64,000 question: will investors go along with this plan? And if not, can they be compelled to?”
And if the powers that be rescue subprime borrowers, doesn’t that mean they have to bail out option ARM debtors when those adjustments hit? This isn’t a strong group of borrowers either. Certainly they are deserving of assistance too, right?