Wikinvest Wire

Government's new 5-year ARM at 2 percent

Wednesday, March 04, 2009

Details of the Treasury Department's Homeowner Affordability and Stability Plan were announced today. It's quite an interesting undertaking that seems like it will be good fun for at least the next couple years as stories of abuse and odd goings-on come to light.

There are three basic components - aid for refinancing, foreclosure avoidance, and more support to Fannie Mae and Freddie Mac. It is the middle component, more properly known as the "Homeowner Stability Initiative", that is most intriguing and most likely to be abused in ways that can only be imagined today. Here's how the plan will work:

- The lender will have to first reduce interest rates on mortgages to a specified affordability level (specifically, bring down rates so that the borrower's monthly mortgage payment is no greater than 38% of his or her income).

- Next, the initiative will match further reductions in interest payments dollar-for-dollar with the lender, down to a 31% debt-to-income ratio for the borrower.

- To ensure long-term affordability, lenders will keep the modified payments in place for five years. After that point, the interest rate can be gradually stepped-up to the conforming loan rate in place at the time of the modification. Note: Lenders can also bring down monthly payments to these affordability targets through reducing the amount of mortgage principal. The initiative will provide a partial share of the costs of this principal reduction, up to the amount the lender would have received for an interest rate reduction.
The old days of a maximum 28 percent of income toward servicing a mortgage have almost returned. Over the years, many have been turned down for mortgages because they failed to meet this requirement - it's crazy to think that this figure got as high as 50 or 60 percent a few years back and then, well beyond that, when people started to lie about how much they made.

In the second step above - where government money enters the picture - there is a downward limit of two percent for the mortgage rate which, effectively, creates a lower limit on income for qualifying.

In other words, your mortgage payment won't get reduced to zero if you lost your job.

Here's an example of how it would work for "Family C" who, back in 2006, took out a 30-year subprime mortgage of $220,000 at 7.5 percent, on a house worth $230,000 at the time. Since the purchase, their home's value has fallen 18 percent to $189,000 and their income has shrunk such that their monthly mortgage payment of $1,538 is now 42 percent of their $3,650 monthly income.

Here's how lucky "Family C" gets their mortgage payment reduced by $406.
IMAGE Here's the part about the lower limit on the new interest rate:
Protecting Taxpayers: To protect taxpayers, the Homeowner Stability Initiative will focus on sound modifications. If the total expected cost of a modification for a lender taking into account the government payments is expected to be higher than the direct costs of putting the homeowner through foreclosure, that borrower will not be eligible. For those borrowers unable to maintain homeownership, even under the affordable terms offered, the plan will provide incentives to encourage families and lenders to avoid the costly foreclosure process and minimize the damage that foreclosure imposes on lenders, borrowers and communities alike. Moreover, Treasury will not provide subsidies to reduce interest rates on modified loans to levels below 2%.
In the first part of the passage above, it's not clear how they'll determine if it makes more sense to modify the loan or to foreclose, but the two percent lower limit is very clear.

You can just see some of the possibilities here where people will figure out what they need to do to get their income down to that two percent rate - it will usher in a whole new wave of "liar loans", only this time people will be wanting their income to show up on the paperwork at a lower level.

Most importantly perhaps, this sets up a whole new wave of mortgage rate resets in five years as all of these loans revert to market rates which are sure to be much higher than the temporary rate.

This is, effectively, a government subsidized 5-year ARM with rates as low as 2 percent.

My, what progress we're making...


Anonymous said...

Only the US govt could make the solution to the problem the cause of the problem itself.

Brillant Obama how about we cure AIDS by injecting patients with more AIDS. Obama is sooooo smart, what an embarrasment he and his team are and its less then 2 months in office.

Anonymous said...

THis is a brilliant idea. let's make mortgage payments artificially low in order to forestall the inevitable lowering of home prices because mortgage payments were artificially low a few years ago. Brilliant!

Anonymous said...

Wouldn't it make more sense to just foreclose on the house and let the people continue to live there as renters?!?
Why is this not the solution?

Tim said...

That does seem to make more sense - keep the families in their homes and don't put more inventory out onto an already depressed market. But, there would probably be some devilish details involved in turning banks into giant property management companies, which, incidentally, is what they are today, absent the tenants.

Anonymous said...

It's not an ARM that will 'revert to market rates.' According to the article, rates will be 'gradually stepped-up to the conforming loan rate in place at the time of the _modification_.' In other words, in the 5% range.

GD said...

I imagine a jump from 2 percent to 5 percent will be quite a shock to the system.........

Tim said...

That might be an interesting thing to watch - you'd think they'll spell it all out in the loan docs but that could be a big hit to the banks if they have this wave of loans that reset to only five percent in 2014 when interest rates might be much, much higher.

I'm Not POTUS said...

I think you missed another bold section:
The initiative will provide a partial share of the costs of this principal reduction, up to the amount the lender would have received for an interest rate reduction.
How much is partial?
If I am a lender I see instant cash flow here. A lot of loans have a huge gap between the rate being charged and what would work at 38%. That is a big up front handout from the GOV. and the toxic bomb you pawned off to the GOV has a 5 year clock.

All of a sudden the cost to the bank to foreclose will fall to zero.

If I am a CEO I see a lot of short term gains here. Enough to get me a big bonus, pump and dump stock, then quit while I am ahead and book a flight to Aruba.

Todd Temaat said...

If you read further in the documentation for the plan (available at, the modified interest rate will reset at a maximum of 1% per year beginning 5 years after the mod takes effect.

The docs also stipulate how banks will determine if the modification will cost more than the's through a formula using Net Present Value of cash flows from the modification vs NPV without the modification.

Joseph Aldeguer said...

Sarcastically Brilliant!

Anonymous said...

This is how Obama’s housing plan is going to use the tax dollars of America’s renter population (100 million people). We should be very, very upset people. Where is the anger?

Your tax dollars are going to be used to enable your landlord to profit even more from you.

What do you gain? You gain another step DOWN the class ladder in America. Renters are no longer second class citizens, we have been downgraded to simple chumps, or cattle for the housing gamblers! Riot!

From a Real Estate forum yesterday:
I am torn.

I read the details of the new program and it appears I will qualify for a refinance to a 2.00% 30-year-fixed. This will give me a $425 payment on a condo I own, which I will immediately rent back out at $1100/month.

I hate, hate, hate, the idea of this program. However, I am tempted to do it. I pay taxes to this horrific government. I am tempted to take part in this horrific program. What do I do?

I don't think the program you are referring to is available to investors, is it?

I admit, however, that I don't know the details of these F'd up bailout programs because I'm a free market guy and if I do read them I feel like throwing up.

My remaining condo was purchased as owner-occupied. I rented it out months later. I have no problem moving into the condo again for a few months in order to drop my payment in half. I'll save $30k over the next five years alone.

Of course, most people will simply commit fraud and fake occupancy through simply changing their addresses for a few months. How the feds don't see that is beyond me. Strike that. The feds are retarded.


Anonymous said...


Anonymous said...

OMG...and this is the reason America is where it is...bcuz of all the dumbshits posting comments out of their a-holes.

Do you understand the concept of helping the PEOPLE??? Honestly your right, why is he doing this...its too help all these GREEDY people that wanted what they could not afford in the first place. Everyone wants to blame someone else for why things are the way they are, how about starting at the source..YOURSELF>>>>YOU the one that obtained a loan as Owner occupied that you did not live in to get the 100% financing, you are as BIG of a theif as the lenders that allowed it!!! What Obama is doing is taking responsibility for his Americans F'ups....we need to learn to take that responsibility ourselves...oooh but wait you can't cuz your a puss!!!

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