Grin and Bair It
December 5th, 2007
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It seems so seductive, the idea that huge numbers of borrowers could be saved from foreclosure by merely keeping interest rates at original teaser levels. That’s the plan put forward by Sheila Bair, chairman of the Federal Deposit Insurance Corporation.
Bair says forget about modifying loans on a case-by-case basis. Instead, let’s have a blanket freeze on mortgage re-sets.
Sounds pretty good, but as I write in my column today for Realty Times, both the details and the overall concept make the Bair plan unworkable.
“If you look at the Bair proposal it’s quick, simple and would put a serious dent in the foreclosure problem. But the Bair plan also has flaws. It penalizes people who financed with toxic loans and then could not make payments when interest levels re-set.
“It also hurts mortgage investors, the people who buy loans. Under the Bair proposal expected interest rates would not be paid. Both investor income and the value of their mortgage notes would decline.”
In other words, the effect of the Bair plan would be to shift costs from lenders — the folks who originate loans — to investors, the folks who buy mortgages for their income and low risk.
It’s not the investors who sold lousy loans to the public, it’s not investors who got fees and commissions for stated-income loan applications and it’s not investors who got bonuses for big quarterly results.
The Bair plan is really an escape pod for lenders and a few lucky toxic loans borrowers who have not missed payments and who cannot afford higher rates. But if they have not missed payments then is that not evidence that can afford higher rates? And if they have missed payments then, well, they don’t qualify. As to FHA mortgage borrowers, it’s hard to see how they would benefit because they were smart enough to avoid toxic loans in the first place. Also, the FHASecure mortgage plan would truly become a loan of last resort because it does accept borrowers with late and missing payments — the folks not covered by Bair’s proposal.
Cute — but a path to nowhere.
Please see: Who Is Sheila Bair — And Why Do You Care?
You’ll be amused — until you get to the part about lower home values and higher interest costs for us all that are the preordained outcomes of the Bair plan.
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