Mortgage Rate Freeze FAQ
Why is Bush Freezing Rates?
There is no clear answer, but some say it is to prevent the subprime mess spiling over into the economy. Republicans want to show they are doing something for struggling homeowners.
Who Agreed to it?
The Bush Administration insisted that it is a voluntary agreement among lenders, investors and mortgage service companies.
Will the Rate Freeze Affect All ARM Borrowers?
No. This plan is only for subprime borrowers. Prime borrowers are not eligible at this time.
Who is Eligible?
Subprime borrowers must meet a list of eligibility requirements:
Borrowers must have:
- ARM Resetting
- Job
- Documented Income
- Good payment history
- Credit score below 660
- Some home equity
- ARM loans originating between Jan 2005 and July 2007
- Resets scheduled between Jan 2008 and July 2010
- Inability to refinance
- Inability to afford payment after reset
- Loan packaged into securities
How Borrowers Will Be Helped?
The Bush Administration estimates as many as 1.2 million subprime borrowers can be helped with the teaser-freezer plan. Other parties are not so optimistic.
Mark Zandi, chief economist at Moody’s, estimates only 250,000 homeowners will be eligible. If that is so, Bush’s plan would only help a mere 7 percent of the struggling population.
How Long Will the Freeze Last?
The rate freeze is for five years. Hilary Clinton is pushing for it to be extended to seven years.
Will Taxpayer Funds be Used?
According to the Bush Administration, taxpayer funds will not be used to freeze rates. However, that does not mean Americans will not have to pay for that in the future.
Freezing rates may lead to credit-rating reductions on some mortgage bonds. If this happens, investors will be less likely to pump money into the American mortgage market and credit will become even crunchier. Borrowers who can get loans will end up paying significantly higher interest rates than they would have in a real ‘free market’.
Why are Some People Against Freezing Rates?
Because it can create a moral hazard. Subprime borrowers, investors and lenders entered into a BINDING contract of their own free will. Their gamble did not pay off.
By bailing out the parties, we are saying that taking risks is okay because we’ll bail you out. This is not the way things should work in what’s supposed to be the world’s free market economy.
Government bailouts will not being the housing market back. Home prices are falling because home prices are too high for incomes. People are losing their homes because they were attempting to live beyond their means. It may seem cruel to leave them to sort out the mess, but it may be the best thing to do as the government intervention will prolong the housing slump and may hurt the economy further.