According to a CreditSights report released Tuesday, the Bush Administration’s recent mortgage interest rate freeze proposal will likely create more problems than solutions for most homeowners.
The report claims the freeze plan will undermine the viability of the secondary market that has played a key role in providing mortgage loans, and will set in place similar expectations for Alt-A borrowers who face resets in coming years.
Creditsights analyst Christian Stracke noted that fifty percent of mortgage loans since 2002 have been made available via lending from the securitization markets, and said loan modifications would reduce the value of residential mortgage backed securities (RMBS).
“The potential contagion into the broader RMBS market could jeopardize the extension of credit through the securitization market, further undermining the benefits generated from the modification plan,” said Stracke.
He also argued that Alt-A mortgage resets could turn out to be just as bad as their subprime brethren, forcing the government to step in yet again to assist another set of at-risk borrowers.
“The combination of option adjustable rate mortgages and traditional Alt-A adjustable rate mortgage resets will be just as bad, if not worse, in terms of the absolute par loan dollar amount as the subprime reset problem, although it is not set to peak until 2010-2011,” Stracke said.
“Assuming the housing market has not shaken off the current slump by 2010, the wave of resets could create yet another wave of foreclosures among a class of homeowners that is going to remember the forbearance offered to subprime borrowers all too vividly,” he added.
Stracke also believes homeowners will lie about their income, and/or intentionally damage their credit scores to attain eligibility for the freeze program.
“We find it hard to believe that borrowers who have too much income and/or too high credit scores to qualify for the modification will not find some way to convince their mortgage servicers that they do in fact qualify,” he wrote.
“The incentive to lie, or even to damage one’s own credit score, is too high,” he added.
The report claims the freeze plan will undermine the viability of the secondary market that has played a key role in providing mortgage loans, and will set in place similar expectations for Alt-A borrowers who face resets in coming years.
Creditsights analyst Christian Stracke noted that fifty percent of mortgage loans since 2002 have been made available via lending from the securitization markets, and said loan modifications would reduce the value of residential mortgage backed securities (RMBS).
“The potential contagion into the broader RMBS market could jeopardize the extension of credit through the securitization market, further undermining the benefits generated from the modification plan,” said Stracke.
He also argued that Alt-A mortgage resets could turn out to be just as bad as their subprime brethren, forcing the government to step in yet again to assist another set of at-risk borrowers.
“The combination of option adjustable rate mortgages and traditional Alt-A adjustable rate mortgage resets will be just as bad, if not worse, in terms of the absolute par loan dollar amount as the subprime reset problem, although it is not set to peak until 2010-2011,” Stracke said.
“Assuming the housing market has not shaken off the current slump by 2010, the wave of resets could create yet another wave of foreclosures among a class of homeowners that is going to remember the forbearance offered to subprime borrowers all too vividly,” he added.
Stracke also believes homeowners will lie about their income, and/or intentionally damage their credit scores to attain eligibility for the freeze program.
“We find it hard to believe that borrowers who have too much income and/or too high credit scores to qualify for the modification will not find some way to convince their mortgage servicers that they do in fact qualify,” he wrote.
“The incentive to lie, or even to damage one’s own credit score, is too high,” he added.
