At an investor’s conference in New York Thursday, Bair proposed a sweeping solution to freeze “teaser” rates so borrowers wouldn’t be struck by payment shock when rates reset.
“Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it,” Bair told investors at the Clayton Annual Investor Conference.
Unfortunately, it’s not so simple, especially since not all borrowers are paying the same low teaser rate on their current mortgage.
And it’d be hard for investors to justify allowing homeowners to pay 1% on their option-arms for the next five years or longer, while homeowners who chose more secure fixed mortgages watched these borrowers get bailed out.
However, Bair’s reasoning is that though interest collected will be less than originally anticipated, some level of interest is better than losses that could stem from loan defaults and foreclosure.
She also felt the solution needed to be a permanent fix, not a temporary mod, as the probability of home prices and credit markets stabilizing in the next few years isn’t necessary a guarantee.
“In today’s housing market you can’t make the assumption that they’ll have enough equity in five years” to refinance, Bair said.
Bair knocked the current process of modifying loans one-by-one, saying loan servicers don’t have the resources to review each loan, and if they wait too long, it could be too late to save many at-risk homeowners.
“We can’t just sit here doing this kind of case-by-case, laborious restructuring process with all these millions of subprime hybrid ARMs,” Bair said.
“We don’t have a lot of good options here,” Bair said in an interview after her speech. “And just to foreclose on all of these properties is not a good option for anybody.”
Bair noted that most adjustable-rate mortgages were made with the intention that homeowners would hold onto them during the fixed-rate period, and either sell the house or refinance before the rate became variable.
“Let’s be honest about it: Hybrid ARMs were never made on the assumption that borrowers could continue to pay them back once the loans reset,” she said.
Her proposal faces a series of complicated challenges, including investor and borrower backlash, legal hurdles, and far-reaching financial implications that will likely never make it feasible.
But the general notion you can take away from her proposal is that banks and mortgage lenders need to act a lot quicker and more efficiently to resolve these issues before the situation becomes completely irreversible.
Bair’s proposal is extended to homeowners who occupy their properties, and is not intended for investment properties or vacation homes, nor for borrowers who are previously delinquent.
Adjustable-rate mortgages worth a record $50 billion are scheduled to reset to higher payments this month, while roughly 1.3 million subprime ARMs are due to reset between now and the end of 2008.
That means bigger and less manageable mortgage payments for millions of Americans.