This super-hyped plan on the table—which has received worldwide press—proposes to contain the costs by limiting the eligible recipients. The plan proposes to instigate a 5-year freeze on the teaser rates in the effort to slow defaults, foreclosures, and financial misery. This is a good thing in principle, as any governmental intervention cannot be all things to all the injured and aggrieved parties. The conditions proposed make a lot of sense on an individual condition basis, but the big question—after all respective exclusions—is just who is left to reap from the stay of execution, or the pardon?
The first condition requires that the properties be owner-occupied. This excludes the speculators who gambled on the faulty premise that property values would continue to rise. Down the pike these real estate investment parcels would be flipped to someone paying an even higher price, the initial mortgage financings would be paid off, and a profit pocketed. Someone else would hold an even bigger mortgage, until they, too, flipped the property. This was the daisy chain I saw again and again in the S&L crisis. Estimates under this condition affect some 25% to 30% of the Sub-prime/Alternative-A pool of units.
The third requisite mandates that the property have positive equity. This condition should all but eliminate any of the Sub-Prime/Alternative-A properties. The lion’s share of these started out being 100% financed. Many such “loans” financed the closing costs and fees as well—so they started out with negative equity. As this bubble seriously started to unwind—and pass gas—market values dropped. Since the beginnings of 2007 property values have declined 5%, 10%, or 15% across the board. In some of the worst markets, the decline already exceeds 20% for 2007 alone. Now....even if the property was only initially financed at 100%, or the subsequent flurry of the “equity” loans brought the property to 100% financed, the subsequent drop in market value made the parcel “up-side-down” and thus not eligible!
If you add that the current payment status be “performing”—with no history of late payments on the property’s ledger—to the aforementioned conditions and criteria, just how many players will be still eligible to partake of the 5-year rate freeze?
Let me put it this way...just how many guys do you know can become pregnant?
I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.
Copyright 2007 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.