Foreclosure Victims: Investors Decry Plan To Aid Foreclosure Victims

Posted on December 5th, 2007 by saman

Investors and some analysts have been highly critical of a government-led plan to freeze interest rates at “teaser” levels on troubled sub prime mortgages. They believe that the plan will do little more than forestall the inevitable and it could result in lawsuits from investors who believe they will be cheated out of their money. Others, however, have said that the Bush administration was taking the correct steps to keep the dangers in the housing market at bay.

Nearly $362-billion in U.S. sub prime adjustable rate mortgages (ARMs) are due to reset to significantly higher rates in 2008, that would likely create a flood of defaults by borrowers who cannot make the higher monthly mortgage payments. As we have already seen, that could definitely exacerbate a wave of write-offs by the investors who currently own these mortgages. Such losses have already amounted to tens of billions of dollars are caused real turmoil in world financial markets.

Whether or not the fed-led plan will succeed, may depend upon the many investors in securities backed by these mortgages. Right now, negotiations are taking place between the administration and lenders that includes investor representatives, but the actual securities are hold all over the world and it would be impossible to track them all down to gain their approvals.

Years ago, just banks and borrowers were involved in a residential mortgage. Today, however, these loans are bundled together and sold to investors, which in turn creates major problems for officials who want to help the borrowers due to the fact that so many parties are involved. One well-known New Jersey fund manager has predicted that the Treasury Department’s plan will merely prolong the agony of the housing slump by merely delaying inevitable foreclosures for those people who really can’t afford the homes they bought, while it permits mortgage-backed securities holders to delay marking down their assets. The fund manager added that all this accomplishes is to reduce the pressure in the short term to bring it all to a clearing price, and that we should just allow it to wash through.

Meanwhile, the Bush administration plan has received substantial praise from a number of diverse sources. Barney Frank, a Massachusetts Democrat and Chairman of the House Financial Services Committee, has offered legislative aid for the large-scale modification of these troubled loans. He has said that he is encouraged by the progress reported in efforts to help borrowers who are in danger of foreclosure.

The plan is now being negotiated by the Treasury Department and a coalition of mortgage-industry people including mortgage counselors, lenders and servicers, the companies that collect mortgage payments. Many particulars are still under discussion, including the length of time the “interest rate freeze” would remain in effect and which sub prime borrowers would be eligible for relief under it’s terms.

Interest rates on approximately 2-million adjustable rate sub prime mortgages will reset in 2008 and 2009, threatening many of the borrowers with foreclosure. Wall Street, however, feels the government shouldn’t meddle in the mortgage markets.