The wires are reporting that the White House is working on a plan that would freeze rates on adjustable rate mortgages for certain borrowers, in an attempt to help curb the rapid increase in home foreclosures expected in coming months. While it certainly will help the situation, consider a slide from Countrywide's Keynote Presentation at the 37th Annual Bank of America Investment Conference in September which showed the following:
Causes of Foreclosure (July 2007)
58.3% Curtailment of income
13.2% Illness/Medical
8.4% Divorce
6.1% Investment property/Unable to sell
5.5% Low regard for property ownership
3.6% Death
1.4% Payment adjustment
3.5% Other
Very interesting...
Wednesday, December 05, 2007
Why Rate Freezes Won't Solve Foreclosure Problem
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6 comments:
You are 100% right.Thank you for posting that.
My .02 - ARM related foreclosures are expected to rocket. So, this rate freeze is provided as a solution to this expected problem. Curtailment of income related foreclosures are probably steady state problem and will remain flat as long as unemployment rate remains the same.
I'm a little confused. If this is the case, why did subprime foreclosures skyrocket? It seems that unemployment has been consistently low all year. How else might income have been curtailed on a large scale?
I would suspect there is a wide discrepancy between unemployment within the pool of people with subprime mortgages, versus those in Alt-A or prime mortgages. Also, this data is from July, and rate resets accelerated starting in September and October, so the number is likely higher now than it was. But the overall point remains, rate resets are not the main factor in foreclosures.
You capture part of the problem where 58% of foreclosures are tied to income events. Remember Texas in 1984? or Massachusetts in 1988? When people get loans with 0%,3%,5% down and the value of the property drops 15% it becomes very easy to leave the keys in the front door. (witness Houston 1984).
Why nake payments to negative equity when you've lied about your income?
This is exactly, exactly right!
It doesn't really matter what your rate is, if your income drops in half or is eliminated completely. And the majority of foreclosures that I come across is due to these top three reasons, with very few ever claiming that a higher payment is the direct cause of foreclosure.
If anything, a rate increase will contribute to the homeowners falling behind faster if their income decreases due to job loss, medical expenses, divorce, death, etc. But few foreclosure victims are that blindsided with a rate increase which directly leads to foreclosure.
Freezing rates and demonizing subprime lenders makes for a good press release, but it won't help actual homeowners.
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