Banks Giving 1-2% Teaser Rates as Modifications

Posted on November 11th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

The re-leveraging of the US home owner has begun. It was just reported on CNBC that part of CITI’s plan was to give temporary teaser rates of 1-2% to ‘help’ borrowers avoid foreclosure.  I have reported in the past that other banks are opting for this route because it costs them far less than a permanent modification involving principal reduction. But ultimately, this route will lead to lost decades in housing.

Its sad when the only way to ‘save’ housing and get borrowers out of default is keep them terribly leveraged by cutting their rates to 1-2%. Exotic loans with teaser rates is what got us here in the first place!

What is also sad is 1-2% is about the rate needed to compete with the exotic loans given to everyone in the past 6 years. This emphasizes how much leverage is in the housing system. This really does nothing to save housing it just keeps housing propped by allowing the borrowers to stay terribly leveraged.

This does nothing to clear the market, only push the problem out. This does nothing to help the gross amount of negative equity around the nation, which is the primary reason for loan default across all paper grades. In CA, 60% of all mortgage holders are upside down in their property.  Due to this the all important move-up buyer is non-existent making for a housing market in which over 50% of all sales come from the foreclosure stock.

Programs such as this also promote bad behavior.  I can tell you right now, I want my 1% loan.  If it takes missing one mortgage payment to qualify, that is an option to the lack of financing available. I have a lot of equity in my home and with the lack of any cash-out loan programs, a 1% loan would essentially allow me to spend the savings on what I would have done with the cash-out from a new loan.

To those of you interested in one of these boiler-plate modifications, be careful. It is my opinion that a mortgage modification must be a market-rate fixed rate loan at a level you can afford to pay with 28/36% debt-to-income ratios.

This means principal balance reductions are a must. If not, you are just renting your home because housing prices will not ‘come back’ any decade soon. That is of course, they bring back all of the exotic loan programs that allowed a $80k a year income buy a $800k home or wages rise 300%.

For those of you interested in mortgage modifications, please read the reports below. They will tell you all you need to know. –Best Mr Mortgage

Mr Mortgage on Mortgage Modifications

Mr Mortgage – Recent Home Sales Reports

18 Responses to “Banks Giving 1-2% Teaser Rates as Modifications”

  1. The data are from Loan Performance. I saw the Nevada discrepancy but either way it is terrible.

  2. You are always right on, Well most of the time.

    Big question who can I start a gampign to to email financial reporters
    How are all the loan mods and new type loans, especially the ne Fannie and freddie 90% of value mods going to determine value of the property.

    Maybe they are going to use AVM’s or Zillow which most have a 15-17% variance

    What do you know

  3. Mr. M, I’m out of the loop, but I didn’t think CITI did much in SoCal.

    JAllen

  4. MrM,

    Great blog. Thank you for your efforts.

    Do any of these mods move people from non-recourse to recourse loans? This seems to be a key sticking point. If I was upside down on a mortgage, and could walk, with no chance of treading water again, I’d walk, rather than re-fi into a recourse loan. Thoughts?

  5. I was thinking of buying a place in the next year or two but if the prices are artificially propped up I will save my money and rent. I’m not going to overpay to bail someone else out. Rent vs buy is still way out of whack in urban areas.

    This is starting to look like the lost decade in Japan (more so than it already is). Anyone care to comment?

  6. LOL..this is a form of what I said should have been done 1 year ago..with the only mistake being that this “fix” is a waste of time…the biggest mistake made by the goverment was giving these lenders the bailout money FREE AND CLEAR..part of the bailout requirement should have been the PERM modification of these community killer toxic loans to fixed affordable loans…but hey that would have been to easy…the biggest complaint from lenders was that their investors would not agree to it..well..would the investors agree to losing EVERYTHING instead of a small amount..simply put the goverment made it too easy and the banks just want to try and save face as they enjoy the benefits of getting the same type of easy money that they just gave away a few years ago to homeowners..must be nice knowing no one is going to foreclose on them!

  7. Thanks for the site. Very informative. I agree with everything you pretty much say, but just one question, are you a proponent of Principal Reductions? This seems ridiculous unless the appraisers appraise the homes for sale to the lowered Principal amount. The problem is still as you have stated before that incomes do not match home values and until this changes home sales will not pick back up.

  8. Mr. Mtg–

    THIS IS GETTING SO FRUSTRATING, and I have concluded that it simply does not pay to live within your means, and play by the rules anymore.

    To date, every single government-led effort accomplishes nothing but keeping the artificially Ponzi scheme-driven prices propped up, just kicking the damn can down the line. Like so many people, I have been saving and waiting to get a home that’s pricing is in line with fundamentals, but refuse to catch a falling knife.

    I have heard not one plan, or one idea for what we are going to do with existing foreclosures!! Howabout a plan for creating a solid foundation of new homeowners?? Howabout giving the same special LOW interest rates and loan terms to people with good credit, jobs and a little money in the bank, so they can take a foreclosed home off the market, and keep it??

    Do you think they will ever do the right thing and reward financially prudent, responsible people??? Do you ever think they will admit that they know what the REAL problem is??

    HOUSING PRICES MUST CRASH AND CRASH HARD??? THEN WE CAN START ALL OVER.

  9. Amen David!!!

  10. Looks like the Banks have not learnt anything. They are back on this option arm, the real root cause of the crisis. People will never learn either from their mistakes. Now they will pay the minimum 1-2% interest and the rest will be charged on their current mortgage. At the end of the year they will owe more than their property is worth and we will be back to square one.
    We the people need not give out another bailout to such idiotic Banks who are only looking to get rich.

  11. This is just another way of propping up home prices. Price controls have never worked in any economy. This will surely lead to a prolonged recession. The sad thing is that banks are doing this to buy time and eventually .gov will be getting the printing presses working 24/7 to bail them out. We will have hyperinflation along with a recession which will be very, very frightening.

  12. a necessary evil mr. m

    what’s the alternative;

    homeless, or more pressure on the rental market which will find itself in the same predicament requiring REO’s to be flipped with low balances or govt rent subsidies…

    that sucking sound u here:
    no matter which path is taken from this point it is a redistribution of wealth and assets.
    in other words govt ends up a landlord in the long run, so why bailout these banks for the purpose of cap redux programs when all they are going to do is divvy the cash and close shop.

    plan = hold off on bailouts until all the losers are dead.

  13. In this post, you state that 60% of mortgage holders in CA have negative equity but on your previous post, Bubble-States Awash in Negative-Equity, the chart you posted shows 27.4% of CA mortgages with negative equity. Which one is it? Or are you just being dramatic in this post?

  14. Where is the frickin justice for those of us who are responsible with our credit? I turned my home in Sacramento area into a rental and have been making my payments on time all the while this home keeps going down in value. I may just have to join the heard, stop paying making my mortgage payments, both HOA payments, insurance and property taxes, collect the rent to pay my new rent, screw my renters over and let the bank deal with yet another foreclosure or let them completely wipe out my 2nd and modify the 1st into a 30 year fixed (permanent) not temporary 1 – 2% fixed. I’M SO SICK AND TIRED OF HEARING ABOUT THE F’ING BAILOUTS, WHERE IS MY BAILOUT?????? The $1200.00 check I received ain’t cutting it. Maybe I should also quit the damn mortgage business and go to work for AIG or Goldman Sachs so I can get a golden parachute compensation package and stop trying to lead an honest and ethical life. I know some of you will laugh, I’m in the mortgage business andI said honest and ethical in the same sentence. Believe it or not it does happen. Anyways, this thread has just made me cringe. All the big banks are finally waking up and stating publicly that they better start modifying, but the problem is how do you trust the same damn bank that let you get into the predicament that you are in? 2009 is shaping up to be a real sh%$t pickle!!!!

  15. David,

    It still pays to live within your means and save. One must accept the world as it is and adjust to it. It is not fair and never will be, but lower housing prices are coming and buying to rent out will soon be back.

    CompaJD,

    They do not have enough new money to prop up housing prices. They are just trying to delay the day of reckoning.

    Auggie,

    There never will be justice for those who do the “right thing”. Just see the world as it is and adjust.

    What is happening now is the “politically correct” response to those suffering from being upside-down.

    Many were the victims on mortgage brokers and many gladly took whatever the mortgage broker was offering. Very high paid investment managers bought ‘shit’ and should be in Joe Arpio’s Tent City in the Arizona desert.

    That is all water under the bridge.

    What can you do now?
    Get your latte from McDonalds rather than Starbucks
    Embrace free digital TV and get rid of your cable
    Be less aggressive in your driving and save on gas and wear and tear on your car
    Have a brown bag lunch
    Be frugal and start saving!

  16. I agree 100 percent. The answer to this mess is to clear it out (all the problem owners)…The Govt needs to stimulate buying if they can qualify under conforming limits at a fixed rate of 3 percent. Anyone who can qualify can get this rate. New Home Purchases only. All Refinances are allowed only if they are paying on time. Anyone late, no benefits. YOu do not reward a better rate to subprime clients (ones that are late right now). This is the answer and you have to shop the loans , get appraisals, close with closing attorneys, call a title company and stimulate the economy all the way to moving companies to banks, to brokers to appraisers..this is the answer and the only one..it will be painful but we will see the light and this is not a bandage like every other option I have seen..

    Kurt D

  17. The problems owners are homeowners who purchased in the last 5 years approximately with a fixed or adjustable,with or without a down payment, that 93.57% of homeowners are paying their mortgages on time. That percentage is as of 8/31/08, with values still decreasing and more adjustable mortgage still waiting to re-set that percentage should also decrease though, those are your problem owners.

    The real problem is the government does not want to let the lenders or investors take a loss in their income producing mortgage back securites. Everyone in government and the mortgage industry is aware that home prices are headed toward over-correcting creating more of a mess. Until the government mandates a blanket reduction in mortgage loan principal balances for all homeowners affected by the negative equity and controls the deflationary cycle of housing at the same time, the foreclosures and falling home prices will continue.
    I had faxed a 46 page proposal that will end the downward cycle and benefit all homeowners affected by negative equity, but it called for the lenders/investors to take a 20 cent on the mortgaged dollar loss to all the senators and FNMA. Surprise FNMA is the only response I received back, that they are forwarding the plan to Sheila Bair, Chairman of the FDIC for data base review.

  18. […] or later house prices are going to collapse there’s no stopping it, these new programs are swimming upstream against the subprime […]

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