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FBR Research: Teaser Freezer Plan Smoke & Mirrors
By James Comtois
A coalition of mortgage-related companies called the Hope Now Alliance, and government regulators are working on a plan to temporarily freeze interest rates on certain subprime home loans ahead of interest rate resets. According to a report released by FBR Research, the plan is "more hype than substance."
Although details of the plan, nicknamed "Teaser Freezer" are still being finalized, it appears that it will be done on a case-by-case basis and only for those borrowers who are able to afford current teaser payments, but would be unable to afford the new reset mortgage rate.
According to FBR, servicers are already slowly working through their books on a case-by-case basis in an attempt to refinance or modify borrowers in good standing. FBR does not believe the Teaser Freezer plan is anything different than what is already being done in the market. We believe the government hoped to create a more broad-based solution where servicers would freeze all teaser rates, but this probably proved unworkable.
The other issue with the Teaser Freezer plan, according to FBR, is that it only addresses subprime loans. HELOCs, alt-A hybrids and payment-option ARMs are not addressed. Many government and policy makers feel this is a subprime problem, which is completely wrong.
Approximately 2 million subprime mortgages (more than $350 billion) are expected to reset in 2008, which will likely result in accelerated default rates. FBR asserts that declining home prices further complicates the problem, as borrowers are more likely to walk away when there is no equity at stake.
Treasury secretary Henry Paulson, speaking at an OTS housing forum, said that borrowers with "steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate, but cannot afford the higher adjusted rate" will be the focus of the Teaser Freezer plan. According to FBR, it will be a "very big challenge" to segregate these borrowers. Apparently, the loan servicer will evaluate borrowers on a loan-by-loan basis. This process will take time and will be expensive.
FBR maintains that the plan will affect a limited number of borrowers, many of whom might receive a loan modification even without a government-sponsored plan. The plan will not enable borrowers who are unable to pay their mortgages to keep their homes or support home prices.
It is all about high loan-to-value products, which the Teaser Freezer deal does not address. Home equity lending, especially in the 80/10/10 and 80/20 products over recent years allowed borrowers and speculators to purchase homes with little or no money down. Not only are subprime borrowers struggling, but large prime HELOC portfolios are also showing a lot of stress. Despite declining home prices, HELOC portfolios continue to grow, due in part to the recent difficulties selling these loans to the Street. We expect losses will continue to rise until home prices stabilize, which we expect to take another four to six quarters.
Roughly 50% of loan modifications end up defaulting at some point anyway, according to FBR. Any loan modification plan can add stability to the market, but it cannot fix a stressed-out borrower in an overvalued home.
FBR concludes that, while loan modifications might increase overall economic value, it trades economics between the different tranches in a securitization. The legal standing of any broad-based loan modification is unclear.
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