Bush Announces Rate Freeze for Subprime Borrowers

By Mike Caggeso
Associate Editor

President Bush announced yesterday [Thursday] afternoon that an agreement made between the U.S. Treasury Department and lenders will secure interest rates for many subprime borrowers.

The deal hones in on borrowers who will fall behind after their introductory "teaser" interest rates reset to higher levels - sometimes adding hundreds of dollars to a monthly payment - between January 2008 and July 2010. In that span, rates will reset for an estimated 2 million subprime mortgages.

The rate freeze applies to mortgages taken between January 2005 and July 2007. 

The condition: borrowers must not have missed any payments at the lower rate.

The agreement follows weeklong negotiations between big-name lenders such as Wells Fargo & Co. (WFC), Washington Mutual Inc. (WM) and Citigroup Inc. (C) - the latter whose troubles were well documented by Money Morning. Negotiations were primarily about the length of starter rates in subprime mortgages (loans given to people with lower credit scores) and the first wave of defaults in August, Bloomberg reported.

The timing couldn't be better, as fresh data from Mortgage Bankers Association (MBA) said that the number of Americans behind on mortgage payments was at a 20-year high at 5.59%. Payments are considered delinquent if they are 30-days or more past due.

While subprime adjustable rate mortgages only represented 6.8% of the loans outstanding, they represented 43% of the foreclosures during the third quarter, the MBA reported.

The markets were up Thursday morning in anticipation of the deal's announcement. Afterward, the market more than doubled the gains already made. No surprise, the financial sector performed well, with Countrywide Financial Corp. (CFC) jumping more than 19% on the day. 

What Happened...

The deal comes on the heels of a severe six months for lenders, starting with the subprime market crumbling when borrowers couldn't afford to make mortgage payments.
This triggered the larger financial fallout because the mortgages were packaged and resold to investors around the world.

Banks were stuck writing down debt, which in turn made securing credit tough for homebuyers because of tighter lending standards. 

Though few banks went under, many announced massive write downs, cut more than 130,000 employees and suffered double-digit profit losses.
Countrywide was the financial sector's poster child of pain caused by the woeful credit market. During the third quarter, Countrywide:

Countrywide also reported a third-quarter loss of $1.2 billion (or $2.12 a share), compared to a profit of $647.6 million (or $1.03 a share) for the same quarter last year - marking the company's first quarterly loss in 25 years.

Additionally, a number of top financial-services companies recorded massive declines in third-quarter profit. For instance, profits declined:

  • 57% at Citigroup
  • 61% at The Bear Stearns Cos. Inc.(BSC).
  • 17% at Morgan Stanley (MS).
  • And 10% at Wachovia Corp. (WB).

... And How Will Investors React?

While this deal scored well across the political board, the largest contingency of cynics is investors.

Businessweek reports that investors in mortgages or mortgage-backed securities - who already took a beating this year - are likely to take another hit if the plan passes because homeowners will pay less on their mortgages than originally planned. 

"The $64,000 question remains: will investors who might balk at going along with this be able to maintain legal roadblocks and prevent the plan from going into effect?" Sen. Charles Schumer, D-N.Y. told the Associated Press.

However, bigger costs incur when a mortgage is foreclosed so this is the best scenario for investors, homeowners and banks, the AP reported. 

News and Related Story Links:

  • Associated Press:
    Bush moves to help on mortgage rates