A plan to freeze interest rates for a segment of homeowners who face the prospect of foreclosure is either political grandstanding, a delaying tactic, a finger attempting to plug a bursting dam, or the right cure for an ailing market, depending on who you talk to in the real estate brokerage community.
Real estate agents and brokers are definitely talking about the Bush administration’s effort to bring together mortgage-market players in a program to assist some distressed subprime borrowers to refinance into safer loans and avoid resetting rates that would lead to more defaults.
An estimated 1.2 million subprime borrowers with adjustable-rate mortgages would be eligible to participate in a fast-track process to refinance or apply for modified loan terms under this program, the Treasury Department announced this morning.
The Treasury Department estimated that perhaps 1.8 million owner-occupied subprime mortgage resets will occur in 2008 and 2009. Treasury Secretary Henry M. Paulson Jr. noted that the plan announced today is “a private sector effort, involving no government money.”
Even before the details of the bailout plan were revealed, real estate industry professionals were already talking about the potential impact to consumers and the real estate industry.
Some real estate professionals commented in online forums that they preferred to let the market problems run their course and do not favor any efforts to intervene, and some said a rate freeze could potentially do more harm than good to the overall housing market.
“I think it’s going to be a negative,” said Samuel Marcus, an associate broker for Century 21 Laffey Associates in Long Island, N.Y.
“I don’t think it’s going to help the market — I think it’s going to hurt the market, and it’s going to cost somebody a lot of money, be it taxpayers or buyers who went with a conventional mortgage.”
Marcus said he feels for people who were misguided or chose home loans that got them in over their heads, and a bailout program could have short-term benefits but will not likely solve all of the market troubles.
“I would favor no federal intervention. I think we have to lick our wounds and move forward. We should work on changing the system so something like this doesn’t happen again,” he said.
The program seems to have been brought out through political posturing, he said.
In addition to the Bush administration’s efforts to put the rate-freeze plan together for distressed homeowners, Democratic presidential candidates Hillary Rodham Clinton and John Edwards also announced proposals this week to curb foreclosures, and Clinton criticized the Bush plan as too weak.
Clinton’s own proposal would have set a 90-day foreclosure moratorium and a five-year rate freeze for some troubled borrowers.
“I think it’s grandstanding,” said Mike Jaquish, an associate broker for Keller Williams Realty in Cary, N.C.
He said that a plan to freeze mortgage rates might harm liquidity in the mortgage market, as it could sap motivation from investors to purchase mortgage-backed securities.
If investor confidence in the mortgage market sinks further, that could make it harder for entry-level buyers, he said.
“I don’t think (this) is going to make things easier for much of anyone,” he said.
The principal of interfering with money markets could have a more dire impact on mortgage financing than the foreclosure problem, and he generally favors a hands-off approach to the workings of the market.
But he acknowledged that there are some very real problems with foreclosures. “I’m concerned about the overall status of the market. We’ve upset the apple cart big time. An adjustment is going to be made. If things get as grim as people say, the (Federal Housing Administration) is going to be the lender of choice.”
Ultimately, the mortgage problems may heavily leverage the country, he said.
Realtor Krista Fuchs of Prudential Fox & Roach of Exton, Pa., said, “Something has to be done to stop the cycle of homes going into foreclosure,” which can drive up inventory and drive down local home prices, potentially fueling more foreclosures.
But a rate freeze has pitfalls, too. “Freezing the rates will cause problems, possibly lawsuits,” she said. “Hopefully, it won’t deter future investors from buying mortgages. If that happens then the industry and economy is in much bigger trouble than we are now.”
The problem is bigger than a “silver bullet fix,” she said, and it appears “it’s just the beginning.”
Mark Anderson does see a silver lining, though, to a rate-freeze program. “If people are going to be losing homes, and they can keep them at a reduced rate or a current rate, I think it helps everybody. I think it helps Realtors, I think it helps mortgage investors,” said Anderson, a Realtor for Keller Williams Classic Realty in Coon Rapids, Minn.
Buyers who were expecting a “huge fire sale” on homes may not like the idea of a rate freeze, Anderson said. “They want the market to continue sinking. But at the end of the day it’s going to be helpful for everyone. It certainly beats the alternative of all those folks losing homes over the next five years.”
And while there may be worries about lawsuits, Anderson said that was surely a part of the discussion in putting together a rate-freeze plan. “This could only be good for (investors),” he said, “They’re not going to lose as much.”
He added, “The breathing room and extra time should allow people with marginal credit to qualify and refinance themselves out of their adjusting ARMs.”
The National Association of Realtors announced its support for the Bush administration’s efforts to curb the rise in foreclosures by allowing loan modifications or a freeze in interest rates for some borrowers.
“The dream of homeownership should not turn into a family’s worst nightmare,” Richard Gaylord, NAR’s 2007 president, said in a statement. “The loan modification program introduced by President Bush and U.S. Treasury Secretary Henry Paulson is a good first step in helping deserving families keep their homes.”
The association also supports Fannie Mae and Freddie Mac reforms such as an increase in the conforming loan limit to aid home buyers in high-cost markets and improve mortgage liquidity, and also supports FHA modernization legislation.
Jerry Howard, president of the National Association of Home Builders, said that the plan has “the potential to get us out of this down cycle that we’re in,” as it could stabilize home prices and renew demand in new homes.
The home-building industry, he said, may start to see that increase in demand manifest itself in the second quarter of the year, with an increase in production by the third quarter.
He said that he didn’t know how many owners of new homes might be eligible for the mortgage relief program introduced today.
Jennifer Bukaty, a broker for Bridgetown Realty Inc. in Portland, Ore., said she doesn’t believe a rate-freeze plan is ultimately going to succeed because she believes there are too many legal complications.
She said that part of living in a free country is accepting responsibility for your actions.
“I think individual people made individual choices. I’m sorry about the mortgage industry, as well. I think the good ones are writing good, solid loans and doing the right thing,” she said.
She acknowledges that the average consumer may not understand the intricacies of mortgage financing, adding that she directs her own clients to stay within their means and does not lead them to seek risky loans.
It might be more worthwhile to focus resources on the perpetrators of mortgage fraud, said Lenn Harley, broker for Homefinders.com, a real estate company that operates in Maryland, Virginia and Florida.
“I can’t stand things that are unfair, and there’s going to be a great deal of unfairness in this (plan),” she said.
She said any bailout plan will not prevent the inevitable — properties that are already in a foreclosure process, though it may delay rather than prevent some aspects of the market downturn.
“Sooner or later the market will rule and when the market rules all of those people who didn’t make mortgage payments go into foreclosure,” she said.
Prices have been rising at a much faster clip than income, she said, and those prices will have to come down. “This isn’t going to help,” she said. “It’s all political.”
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