Interest Rate Roundup

Thursday, December 06, 2007

Still more Paulson Plan details

There is so much being said about the Paulson Plan, that you probably don't need me to point everything out. A few key points to expand on/clarify what I said earlier about who's eligible:

* Loans must be subprime ARMs with an initial fixed period of less than 36 months (that'd be your 2/28s and 3/27s). Borrowers had to have obtained subprime ARMs between 1/1/2005 and 7/31/2007, and have rates that will increase between 1/1/2008 and 7/31/2010.

Only borrowers with FICO scores below 660 and less than 3% equity in their homes qualify (though anyone who "fails" the FICO test may still be eligible for an alternative modification). It has to be a primary residence. Borrowers must not have been more than 60 days delinquent at any time in the last year, and they must not be more than 30 days late currently. An evaluation of the potential rate and payment reset must determine that the payment will increase by more than 10%. Complete details can be found at this American Securitization Forum web site (PDF link).

* Some more details on the scope of the reset problem were delivered in a speech by FDIC Chairman Sheila Bair:

"The FDIC's calculations, based on owner-occupied subprime mortgages included in private MBS, indicate that about 1.7 million hybrid loans worth $367 billion are scheduled to undergo their first reset during 2008 and 2009. Of these, over 200,000 loans are already 90 days or more past due or in some stage of foreclosure prior to reset. For loans that remain current or less than 90 days delinquent, only 2.9 percent show both a loan-to-value ratio below 80 percent at origination and a debt service-to-income ratio below 30 percent -- attributes that might indicate a high probability of remaining current even after reset. Based on these criteria, our numbers suggest that the group of loans scheduled to reset that are current but may not remain so after reset are on the order of at least 1.4 million loans."

* Paulson's statement can be read here. Comments from the Homeowneship Preservation Foundation, which operates the 888-995-HOPE hotline, can be found here.

* Not clear how the ratings agencies will evaluate modifications. Some preliminary thoughts from Fitch Ratings are available here, with an excerpt below:

"Fitch Ratings believes that on balance, by mitigating the impact of ARM resets on borrower default rates, the framework can help to reduce the risk of principal loss on senior subprime RMBS. Increased refinancing opportunities via FHA and other programs are also important to stabilizing default rates. The implications for subordinated RMBS classes are unclear, as they may be exposed to a complex interaction of variables that can be difficult to analyze. Implementation of the proposed data reporting will aid analysis of the impact of streamlined modifications, and analysis of loan modifications generally."

Standard & Poor's, for its part, said it may need to cut ratings on certain mortgage bonds to account for the program's changes, though the freeze may help mitigate foreclosures overall.


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