Up In ARMs - The Mortgage Bailout

"Grumble, grumble, grumble," echoed loudly today across America after The President, along with members of the Treasury, unveiled a "plan" to help stem the rising tide of foreclosures.

Ostensibly, the new plan is to prevent foreclosure by "freezing" the interest rate of ARMS (adjustable rate mortgages). But that's not what was said. Basically nothing of substance was announced other than an incorrect phone number.

Some highlights:

- Bush reminded us of the newly formed FHASecure program which attempts to refinance qualified homeowners through special, expanded FHA criteria.

- He went on to introduce HopeNow, a private sector co-op established to "help struggling homeowners find a way to refinance". HopeNow's systematic approach supposedly has a 3 step program for homeowners.

- Step One. Try to refinance through conventional means.

- Step Two. Attempt refinance through the elusive and mystical FHASecure program (it's almost hopelessly impossible, not widely understood, and not widely available. Will it get better? Maybe. But for now, it's a joke).

- Step Three. Well, Bush alluded to a step 3, but as far as I can tell, HopeNow doesn't know anything about it. But hey, I only called eight times.

Before I tell you about my phone call, here are his exact words:

"HOPE NOW members have agreed on a set of industrywide standards to provide relief to these borrowers in one of three ways: by refinancing an existing loan into a new private mortgage, by moving them into an FHA Secure loan, or by freezing their current interest rate for five years."

And here are the eligibility requirements that would allow me to freeze my rate:
1. Have a loan originated between 1/2005 and 7/2007 (check), with a reset between 1/2008 and 7/2010 (check!),
2. Have made all my payments on time (check!!),
3. Can't afford the reset payment (check?),

Excited to have an ARM adjusting in June, I called HopeNow to find out how I could get my loan frozen. Here's the conversation as it happened almost word for word each of the eight times I called (almost is if they had a script! Hard to imagine for a call center!):

Me: "Hey, I'm calling to find out how to get my loan frozen."
Them: "We are a consumer credit counseling service. We do counseling,"
Me: "I'm not behind on my mortgage, and I meet the other guidelines, but I have an adjustment coming up and I want to freeze it.
Them: "We don't do that"
Me: "But I just heard the president say that you would help me?"
Them: "He gave our number as a resource because we are counselors"
Me: "So you can't help me freeze my loan?"
Them: "We are counselors, we don't do that here."
Me: "Well, in June I'm not going to be able to make my mortgage payment, what do I do?"
Them: "I don't know, as I said, we are just counselors"

Wow! I feel bailed out! Yes, I know that these amazing reforms will not operate smoothly overnight but I want to tell you why today's announcement means nothing. And all the talking heads that are enflamed for some reason or another can just chill until something definitive occurs.

Paulson was clear to say that "the industry standards announced today do not change the nature of the responsibilities in the servicing industry." In other words, the government is not enforcing anything. It's up to the homeowner to contact HopeNow for, "counseling."

All that has been established is a set of non-compulsory streamlined guidelines for evaluating the frozen loan candidates. No loan servicer is required to do squat! Just to be a freeze candidate you would have to fail to qualify for a conventional refinance, and fail to qualify for FHA secure, and meet the credit guidelines for the freeze. As a mortgage broker at ground level, I can tell you that's a tall order.

For the minority that is eligible, it is still only a "suggestion" made by the government. Just because it's available doesn't mean it will get used. The one thing I can promise is that servicers will always do what makes them the most money. The first two "options" offered by the president today have little to no impact on the current market, and certainly do not warrant the opinionated backlash among economists and media.

As for the third option, it's a simple enough deduction. If the servicer thinks it's going to cost them less money to freeze, they'll freeze. If they think freezing is going to cost them more money or anger their potentially litigious investors more than a foreclosure, then expect the foreclosure forecast to stay exactly where it is. The moral of the story is that there is no reason to get hot about this issue yet, as nothing definitive has happened. Until it does, stay cool.