Why Rate Freezes Won’t Solve Foreclosure Problem
filed in housing and interest rates on Dec 05, 2007
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…
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December 5th, 2007 on 3:43 pm
You are 100% right.Thank you for posting that.
December 5th, 2007 on 5:30 pm
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.
December 6th, 2007 on 12:54 am
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?
December 6th, 2007 on 5:37 am
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.
December 6th, 2007 on 8:42 am
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?
December 10th, 2007 on 11:44 am
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.
February 11th, 2009 on 5:24 pm
An idea for saving laid-off workers’ homes.
Many people who are being laid-off today have 401k money. Allow the laid-off worker a hardship withdrawal of his/her 401k money without penality to pay off their mortgage. If the tax liability of the withdrawn amount could be spread over 10 years, I am sure this would also help many.
Using 401k money to pay off a house IS like putting money towards retirement. It is a good, sound investment, and one that pays dividends in many ways. As for the ‘lost’ 401k money, most will find another job. Current rules allow older people to put away about 21,000.00 per year into a 401k. Younger workers will have more time to make up the ‘loss’ in their 401k. All will be better able to pay into another 401k, given they no longer have a mortgage to pay.
June 9th, 2009 on 8:16 am
Not much 401k left these days.