| 12.11.07|
Nest And Egg
“You are not allowed to use the words ‘nest’ and ‘egg’ again…from now on you will have things on toast.” - Albert Brooks, “Lost In America,” to his wife played by Julie Haggerty after she has lost their nest egg at the Desert Inn.
Those who know this movie will remember that after his wife has lost their cashed in life savings, including the equity from their home, Brooks’ met with the casino manager (played by a very talented Gary Marshall) to see if he could get his money back. In a very funny scene, Brooks who had just “dropped out” as an advertising executive tries to convince Marshall of the positive promotions and increased business his casino would get if the casino would return the lost fortune Haggerty gambled away. The casino manager was not buying what Brooks was selling…too bad the casino manager was not President Bush, they may have gotten their money back.
Last week Bush announced an agreement with several major lenders that they would freeze the interest rates of a couple of million sub-prime mortgagors with adjustable rate mortgages effective January 1, 2008. The reasoning behind the move is to save these families’ nest eggs and reduce the chances they may go into foreclosure when their initial, or “teaser”, rates adjust to what is known as the fully indexed rate. At time of the announcement the interest rate freeze received most of the publicity and media attention, but he also announced efforts to reform FHA mortgages and encouraged those in my industry to work hard to refinance borrowers into fixed rate mortgages—something many of us have already been doing, with great difficulty in most instances due to home values, loan amounts and borrowers who are a bit skittish after their previous experience with other brokers or lenders.
The “teaser freezer” issue though is the issue that has garnered the most press and commentary, and rightfully so as there are many aspects of the agreement with which I and many others in the industry disagree. To wit:
• What of the homeowners whose rates have already adjusted and they have already been foreclosed on or will be in the future? Because they adjusted before the January 1st date their rates are not part of the agreement. I guess it is akin to the announcement of the cure of a fatal disease a few days after you have contracted it—great news! Too bad it is just a little too late to help you.
• What happens in five years when the agreement expires and the loans recalibrate to their original terms? Do we face another rash of foreclosures to what will by then, or should be, a healthy real estate market? What happens when one to two million mortgages all adjust on January 1, 2013?
• Does this forgiveness also apply to Jane and John Doe who refinanced and pulled cash out of their home in 2000 to pay off revolving debt…and again in 2002 when they rebuilt their kitchen with top of the line appliances and cabinetry…and again in 2005 when they pulled out more equity to pay off more revolving debt and bought a boat? Does it apply to them for the several hundred thousand dollars in equity they have pulled out of their home with adjustable rate mortgages with low rates starter rates?
• What can we expect for other credit sectors? Will the government step in and force banks and lenders to drop the rates on auto loans? Small business loans? Credit cards? What other markets will the Federal government mandate the price of the services ignoring the free market?
• What effect will this have for future mortgage products? How restrictive will the credit markets become if they have to look over their shoulder and worry about the government forcing them, well maybe not forcing but strongly encouraging them, to rewrite their notes. Will this not further constrain lending and therefore purchasing power of potential homeowners thereby further decreasing demand?
• How does this not reward those in the industry who knowingly put unwitting borrowers in sub-prime mortgages? How does it not create the “I got away with it once I can get away with it again” mentality?
I will state again, and will continue to do so, I am very aware that our industry has some bad apples that lie and cheat and pursued any means to get mortgage applicants and to close them so they could get paid. There are those who steered borrowers towards mortgages that had tremendous profits for the lender or broker. These people exist in the industry—but they are a very small percentage of those in business; but they are the ones that make the great stories for the media and whose clients we read about. The vast majority of the mortgage industry consists of people working hard to help families buy homes, to manage their mortgages and debt and equity to obtain financial goals, who care about their clients. I bring this up because too much of the blame for the housing credit crisis and resulting difficulties in the housing markets is laid at the feet of the lender or broker—and now Bush has asked the lenders to freeze the rates on billions of dollars of mortgages at levels significantly below market rates. Those borrowers lucky enough to have funded their loans at the right time have won, they gambled and while many around them have lost
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