Rate Freeze Plan Could Keep $12 Billion in Subprime Mortgages Current: Report

For all of the bashing the subprime ARM rate-freeze program has taken recently, a new report suggests that the plan may have more merit to it than many in the consumer and popular press might think. The report, published late last month by risk management and due diligence provider Clayton Holdings, Inc., challenges common perceptions and says that the plan developed by U.S. Treasury secretary Henry Paulson and the American Securitization Forum has the potential to decrease delinquency rates among would-be-delinquent borrowers facing a payment reset by as much as 30 percent. The ASF plan, according to the report, could help keep $12 billion in subprime mortgages current, depending on the track of 6-month LIBOR rates. As LIBOR rates decrease, payment shock becomes less of an issue; and the 6-month LIBOR is usually the benchmark used to determine any payment adjustment for an ARM borrower. LIBOR rates have been falling steadily since December, to the point that Clayton said that fewer than 5 percent of subprime ARM borrowers now face a payment reset of greater than 35 percent. In December — with LIBOR rates more than 180 basis points higher than they are now — that number stood at a considerably more threatening 34 percent of borrowers. As a result, Clayton suggests that resource-strapped servicers need not attempt to modify every eligible loan in their portfolio as they look to adopt the ASF plan — assuming LIBOR rates remain low, a focus on those borrowers facing the highest payment shocks (i.e., 15 percent or higher relative to teaser) would deliver the same overall performance benefit as combing through each and every loan. Much more problematic than payment resets among subprime borrowers, at least given the current rate environment, are declining property values and stringent refinancing standards — problems that, as regular HW readers know, are impacting more than subprime borrowers. Clayton said in the report that Alt-A delinquencies rose from 12.71 percent to 15.94 percent between December and January alone; subprime delinquencies rose from 29.34 percent to 31.38 percent. All of which is to say that while the ASF plan has some merit for the borrowers it targets, it isn’t likely to put much of a dent in the overall problems now plaguing both the housing and mortgage markets. The ASF, for its part, has admitted as much recently; the trade group is now allegedly mulling support for expanding access to FHASecure, a government-sponsored lending program targeting troubled subprime borrowers. For more information, visit http://www.clayton.com.