Mortgage Modification Plan: Temporary Relief Only If You Stay Current

The mortgage industry has a plan to help people who are already helping themselves. Adjustable rate subprime mortgage borrowers could get more time at low teaser rates — if they can stay current until the deal gets made. The teaser-freezer plan will sound good and accomplish little.

As we have repeatedly reported (here, here, and here), the government is scrambling to find a way to keep the foreclosure rate from doubling (again) in the next year, with 1-2 million homes at risk. Particularly in an election year. The plan being hatched by the industry, under the guidance of Treasury Secretary Henry Paulson, will call for ARM resets from the early (lower) teaser rates to be frozen in place for two to five years. While the logic of simply pushing the problem to a later date (after the election, perhaps?) may escape many outside Washington, it is the solution de jour.

It has an important caveat: You have to be current to get help. So if you were an “early” subprime victim whose mortgage has already adjusted out of reach, too bad. If you missed a couple payments trying to refinance to a better deal only to have the mortgage well dry up, too bad. Indications are that while 1.1 million homeowners could potentially be helped by this teaser- freezer proposal, another 400,000 will not be. And some estimates are much worse.

Politically, this may not be entirely accidental. It appears that a large portion — potentially more than half — of subprime mortgages placed in the last two years (and adjusting from the 2- or 3-year teaser rates now or next year) were with consumers who had excellent credit. Such middle and even upper income voters are crucial. Making over a million middle class folks homeless during an election year would be political suicide.

The flaw is that it assumes saving the homes of this block of people is enough to stave off disaster. As though the other 400,000+ homes that would be lost don’t matter. Or as if the industry will be able to adapt the teaser-freezer plan to their operations fast enough to save the rest.

Ironically, the Associated Press reports the only reason the teaser-freezer plan is moving forward is fear of the bankruptcy legislation (we have reported on often) which would allow bankruptcy courts to modify long-term home mortgages. The industry is desperate to see this response eliminated, even apparently if it means going to war with some of their own investors. But they seem more than willing to throw about half a million families out on the streets in the process.