There is a tremendous amount of experience and logic on this forum explaining how an interest freeze is not possible or will cause irreparable damage but this isn't the first time or the last time that the media gave voice to some crackpot scheme so that the market could trade it as the answer to a lot of peoples prayers.

Lets say nothing comes of the whole deal and it is quietly swept under the rug by the New Year. It still accomplished the useful purpose of rescuing every single lenders stock price out there along with related industries. I believe they got exactly what they wanted out of this press release. Any further action is not necessary.

Let's see now. One of the stories on the Implode-O-Meter is titled

Why $900 Million Helped Less Than 100 People Refinance

.... Shows how well these government led ideas work, don;t you think.

Yesterday I noticed another countrywide Ad letting consumers know they can help them refinance with no money down How do they do that. Why with higher spreads of course, so they get the cash out by further amortizing the loan! (Or in simpler terms, highway robbery).

Yeah, I can see how freezing the ARMs is going to help BOTH the home owner and the lender!?!

U.S. Urges Freezing Some Rates on Loans
By EDMUND L. ANDREWS
WASHINGTON, Nov. 30 — The Treasury Department is leaning on mortgage lenders to temporarily freeze the interest rates on subprime loans for homeowners threatened with foreclosure, but the scope of any relief will depend on crucial details.

Treasury officials said Friday that they were “pleased by the progress” in persuading major lenders to freeze the comparatively low rates on hundreds of thousands of home loans that are scheduled to increase over the next 18 months.

About two million homeowners have subprime mortgages with teaser rates that are scheduled to jump 30 percent or more. Federal officials predict that about 500,000 of those families could lose their homes; some analysts warn that the number could be significantly higher.

Federal officials and industry executives refused on Friday to disclose specific details, which are likely to make the difference between a plan that shields hundreds of thousands of people and one that shields almost no one.

On Thursday, executives from several banks met with Treasury Secretary Henry M. Paulson Jr., as well as officials from the Federal Reserve and the other bank regulatory agencies. The meeting, first disclosed by The American Banker, included top executives at lenders like Citigroup, JPMorgan Chase, Wells Fargo and Washington Mutual. The meeting included the American Securitization Forum, which represents investors and Wall Street firms with a stake in the mortgage-backed securities.

Mr. Paulson may provide some details on Monday when he speaks to a housing conference.

After Thursday’s meeting, industry officials said they were close to developing a standard for deciding which homeowners would qualify for a “loan modification” — a temporary freeze of their teaser rates — as well as how long the freeze would last.

But as of Friday night, there still appeared to be disagreements about the specifics. The chairman of the Federal Deposit Insurance Corporation, Sheila C. Bair, has argued in recent weeks that lenders should make the teaser rates permanent but has also said that a five-year freeze would provide a big help, according to government officials.

Industry executives have sought a shorter period with some recommending one year. One mortgage executive, speaking on condition of anonymity because the discussions are still fluid, described a three- to four-year freeze as the possible “sweet spot” for a compromise.

Advocates for distressed homeowners said a one-year freeze would do little to help troubled borrowers because few of them would be able to switch to a conventional mortgage with a lower rate in that time. A longer freeze would give homeowners time to build equity in their property or improve their credit ratings, both of which are crucial to obtaining lower rates. But a longer freeze would be costly to lenders and their investors.

“The tricky part is to figure out how to minimize the gaming,” said Kurt Pfotenhauer, senior vice president of the Mortgage Bankers Association. “All these people are contractually obligated to pay these loans on the terms they agreed to pay on. We need focus on people who, without this help, wouldn’t be able to stay in their homes.”

Several Democratic lawmakers praised Mr. Paulson’s effort to promote a systematic approach by the industry. “I am encouraged by reports of progress,” Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, said. “If additional legislative action is necessary, we stand ready to work with the secretary as this process moves forward.”

But specialists warned that it was too soon to describe the effort as a breakthrough, and some advocates for homeowners were skeptical that a voluntary plan by lenders would bring much relief.

“We need an increase in loan-modification activity that is so dramatically above what’s happening in the marketplace that it’s hard for a purely voluntary agreement to get the job done,” Eric Halperin, director of the Washington office of the Center for Responsible Lending, said.

Mr. Halperin, citing a report by Moody’s Investor Service, said mortgage servicing companies were modifying only about 1 percent of their troubled loans. One big reason, according to many specialists, is the difficulty in reaching agreement between the companies that service a mortgage and the investment funds that actually own the loan.

But lenders and investors alike are under political pressure to come up with answers. House and Senate Democrats are pushing bills to stop so-called “predatory lending” that would restrict several practices that are common among subprime lenders. Democrats are also trying to pass a bill that would authorize bankruptcy judges to change the terms of a mortgage to help people keep their homes.

Industry executives adamantly oppose the proposal, saying it would dry up capital for mortgage financing by removing a pillar of security for investors.

Within the industry, much of the struggle is between the original lenders and loan servicers on one side and investment funds that ended up owning the mortgages through complex investment securities on the other. Many lenders have been willing to offer freezes, but investment funds are leery because they would shoulder most of the cost.

Harvey L. Pitt, a former chairman of the Securities and Exchange Commission who is working for some hedge funds with a stake in the debate, predicted that even a generous freeze would only benefit a minority of subprime borrowers.

Mr. Pitt said a freeze would do nothing to help people who took out “no-documentation” loans, overstated their incomes and borrowed more than they could repay. Nor would a freeze help people whose mortgage is higher than the value of their homes. In the last two years, hundreds of thousands of people took out loans equal to the purchase cost of their houses — only to see housing prices decline.

One administration official said on Friday that Mr. Paulson was not trying to “bang heads together” in reaching an agreement.

But Randall Kroszner, a governor on the Federal Reserve Board who participated in the meeting on Thursday, said lenders and investors stood to lose less by modifying many mortgages than they would by foreclosing on a house.

Take a look at the following savvy analysis by Lance Lewis. I agree that this freeze won't work.

"Bailout proposal from Paulson of somehow freezing adjustable rate mortgages in order to “prevent” foreclosures, which will never work given that lenders have all structured their businesses around these instruments already.

You can’t just change the rules in order to rob Peter (the lenders) to pay Paul (the homeowners), because Peter has counterparties that depend on him that will also suffer after he is robbed, which will cause others within the financial system to suffer and so on. This fact is another reason why all roads continue to lead to the same place in my mind (i.e. - the Fed will be forced to inflate and basically end up robbing everybody at the same time through inflation).

Incidentally, whatever happened to that Super-SIV bailout? Oh yea, that sort of died on the vine too. This latest bailout scheme from Paulson will meet a similar fate in my view."

Help May Be on the Way

Skeptics abound, but Hank Paulson says a breakthrough is near that could rescue troubled homeowners

by Jane Sasseen
Business Week November 29, 2007, 5:11PM EST

Passing squall or supersized economic blowout? However the housing and credit-market upheavals play out, they will shape the legacy of Treasury Secretary Henry M. Paulson Jr. From the start, he has tried to orchestrate a private-sector-led response to the wave of home loan defaults and price declines under way. But progress has been glacial.

Yet a comprehensive program may be within reach. It would get mortgage lenders, servicers, and investors to help eligible homeowners to renegotiate adjustable-rate mortgages (ARMs) that will reset and become far more expensive. "Well before the end of the year, we will have a template—and the infrastructure in place to make it easier to handle the wave [of resets] that is coming at us," he said in an interview with BusinessWeek.

"Focusing on the Middle"
The problem so far: Refinancing relief has largely been on a case-by-case basis, and the industry has been unable to agree on broad-based criteria that would allow it to quickly evaluate large pools of homeowners based on their financial standing. As things stand now, mortgage servicers have adjusted just 1% of the subprime loans on which rates reset in the first half of 2007, according to Moody's Investors Service (MCO).

Given the scale of the crisis, and the complexity of the ownership of securitized mortgages, only a sweeping plan involving all the industry players is likely to prevent a wave of foreclosures. Paulson, who was scheduled to meet mortgage leaders on Nov. 29, argues that a deal could go a long way toward easing pressures. He says the talks, which involve servicers and investors covering 85% of the market, will give rise to a far speedier and standardized method both for processing such workouts and determining who might be eligible.

Those who can readily pay after their resets won't qualify, of course. Yet neither will those who don't have the financial means to own a home even after refinancing. "We're focusing on the middle bucket," says Paulson. "We'll have broad agreement on criteria that will make it easier to modify mortgages in the volumes we need."

ARM Wrestling
Some sort of breakthrough would be welcome. With market conditions deteriorating and Wall Street fearful that recession risks are rising, critics are asking whether the Administration needs to get far more aggressive in its approach. The U.S. stock market has been in manic-depressive mode for weeks on recession worries, and credit conditions have tightened.

Next year, without a better mechanism for home loan workouts, the mortgage industry turmoil could enter a dangerous new phase. Through September, roughly $45 billion in subprime ARMs were reset each quarter this year, according to Banc of America Securities (BAC). Starting in December, and through all of next year, that will jump to an average of $90 billion a quarter.

Paulson's efforts, if successful, would build on a similar push by Sheila C. Bair, head of the Federal Deposit Insurance Corp. In late October, she argued that mortgage servicers and lenders should simply freeze interest rates on resetting ARMs at the initial teaser rate, often around 7% to 9%. That's already above the mortgage rates borrowers with good credit pay. To qualify, borrowers would have to live in the homes—speculators need not apply—and be current on their payments.

So far, she has found one taker: On Nov. 20, California Governor Arnold Schwarzenegger announced a deal with four of the largest mortgage lenders in the state to streamline the loan-workout process and extend for at least several years the initial mortgage rates for struggling subprime borrowers. With some 500,000 loans scheduled to reset in the state over the next two years, California officials say the changes could help some 100,000 homeowners.

A Housing Market Emergency
Some complain the feds haven't done as much as they could. Yale University economist Robert J. Shiller and Clinton-era Treasury Secretary Lawrence H. Summers, who both warn that the U.S. housing market could face price declines of 25% to 30% in the next several years, have recently criticized what they see as a too-timid response to the crisis. Shiller says: "When someone's in the emergency room, you've got to give them care right away."

Shiller thinks personal bankruptcy laws should be modified to make it easier for troubled borrowers to stay in their homes. Summers argues that more is needed to keep money flowing to creditworthy home buyers, using the Federal Housing Administration, Freddie Mac (FRE), and Fannie Mae (FNM)—huge government-chartered entities that buy mortgages and package them into securities. He suggests that the government may even need to provide loans directly, or extend tax breaks to stretched families.

Paulson says his team is anything but timid. "We are examining all public policy ideas," he says. "We are being aggressive, and our thinking continues to evolve as we learn more."

Realistic Values
Shiller and others believe more could be done through the FHA. Already, the Bush Administration has backed a program to let the agency expand its loan guarantees to some subprime buyers able to refinance their loans. But Alex J. Pollock, formerly head of the Federal Home Loan Bank of Chicago and now at the conservative American Enterprise Institute (AEI), says the FHA could take on a larger role in helping to ease pressures on subprime buyers whose homes are now worth less than their mortgages.

Pollock argues that the FHA should insure the refinancing of such mortgages at more realistic new prices, with Fannie or Freddie then buying the new loans from the mortgage lender. "What you want is a place where the borrower comes out ahead based on the current value of the home, and the lender comes out ahead compared with foreclosure," he says. This will "prevent the bust from going into a self-reinforcing downward cycle."

A severe housing bust is a scenario unacceptable to Paulson and the Bush Administration, though there is deep aversion among some free-market purists for anything that smells like a bailout. "This is what happens when people make imprudent decisions," says Peter J. Wallison, a Reagan-era Treasury official now at the AEI. He doesn't think the government can do much more to head off a housing-led recession than continue to cut interest rates. But in the face of worsening economic conditions, that is a view Paulson doesn't embrace.

The Associated Press December 1, 2007, 6:53AM ET

Paulson works with industry on loan plan
By MARTIN CRUTSINGER

The Bush administration and the mortgage industry, trying to combat a massive wave of foreclosures, are hammering out a proposal to temporarily freeze interest rates on certain troubled subprime mortgages. If adopted, it would be the biggest action taken to cope with the unfolding crisis.

The administration was still holding discussions on Friday, trying to work out details of the proposal, which could be unveiled as early as next week. Some indications of the outlines of the proposal may come in a speech Treasury Secretary Henry Paulson is scheduled to deliver to a national housing conference on Monday.

"We're moving as fast as we can move," Paulson said Friday in an interview with ABC News. "We're doing everything we can to deal with a complex problem and help the industry come together in a way which is going to be good for homeowners, communities and the economy overall."

The talks have involved all the federal banking regulators and major players in the mortgage industry such as Citigroup Inc., Wells Fargo & Co. and Countrywide Financial Corp.

The major thrust of the proposal would be to get lenders to extend for a number of years the lower, introductory rates that were offered on subprime mortgages, loans usually offered to borrowers with weak credit histories.

An estimated 2 million of those initial "teaser" rates are scheduled to reset to much higher levels by the end of next year, pushing the payment on a typical mortgage from $1,200 per month to $1,550, an increase of $350. The concern is that many homeowners will not be able to meet the higher payments, triggering hundreds of thousands of defaults.

That would dump even more unsold homes on an already glutted housing market, pushing home prices down further, jolting consumer confidence and raising the risks of a full-blown recession.

By offering a broad approach to extend the teaser rates for a certain period -- officials and the industry are debating time periods of two to five years -- it would allow homeowners to keep making payments while the housing industry regains its footing.

Once the industry stabilizes and home prices are no longer falling, it will be easier for homeowners to refinance their adjustable rate loans to more favorable fixed-rate mortgages.

Asked about the proposal on Friday, presidential press secretary Dana Perino said, "The president has been clear that no taxpayer money should be used for any sort of bailout."

The plan under consideration does not include any government funds, but it would mean losses for investors who purchased mortgage-backed securities because they would be getting a lower income stream reflecting the delay in having the introductory interest rates reset. But it would still represent more money than if the mortgage went into default.

The rising tide of defaults on subprime mortgages in recent months has already forced a number of major financial institutions to declare multibillion-dollar losses, a development that seriously roiled financial markets not only in the United States but also in Europe over the summer.

Economists on Friday generally praised the administration's effort, saying it should help stave off a potential recession in this country.

"This is a significant problem that could overwhelm the economy unless policymakers take action," said Mark Zandi, chief economist at Moody's Economy.com. "The economy is already on the brink of a recession."

David Wyss, an economist at Standard & Poor's, said offering a blanket approach should prompt more people to seek help.

"People don't want to tell there banker that they can't pay," he said. "But if you tell people in advance that this is what we will be able to do for you, you will get more people going to the banks ahead of time so they can be helped."

A survey by Moody's Investors Service found that only about 1 percent of the loans that reset in January, April and July had been modified by mortgage service firms.

Edward Yardeni, head of Yardeni Research, quipped that the program should be given a catchy title such as the "Teaser Freezer."

Democrats who have been highly critical of the administration for moving too slowly to confront the mortgage crisis were generally supportive Friday of the new proposal.

"This is the first time that the Bush administration is working towards a solution that meets the magnitude of the problem," said Sen. Charles Schumer, D-N.Y. But he said "the $64,000 dollar question" will be if investors will go along with the proposal.

Rep. Rahm Emanuel, D-Ill., called the proposal "an important building block ... to address the mortgage and credit crisis" while House Financial Services Committee Chairman Barney Frank, D-Mass., said he would sponsor legislation if needed to support a move to large-scale loan modifications.

The Rev. Jesse Jackson said the administration's plan did not go far enough. He said his Rainbow/PUSH Coalition will stage protest marches on Wall Street in New York and 50 other cities around the country on Dec. 10 to prod the government to play a bigger role similar to what was done during the savings and loan crisis of the early 1990s.

"This is an economic tsunami," Jackson said. "We need Wall Street and the banks and the government to work together for a public-private partnership like we did for the S&L crisis."

The administration is working through an industry coalition, dubbed Hope Now, to get the new program launched. Elements of the program are expected to be modeled after an approach put forward several months ago by Sheila Bair, the head of the Federal Deposit Insurance Corp. Last week, California announced a similar effort involving four major loan servicing companies.

Bair's plan would apply only for borrowers who are current on mortgage payments but unable to afford loans that reset to higher rates. "We need to have long-term sustainable modifications," Bair said at a news conference this week.

Critics said companies could face lawsuits if they permit modifications that are not in the best interest of investors. Supporters, however, argue investors would stand to benefit because they would avoid the cost of a foreclosure -- estimated to be around $50,000 per loan.

Now the US Admin bastards are going to keep pumping this "teaser freezer" phenomenon for who knows how long
to keep the stock market afloat rather than allowing market forces to decide how this should work out.

In either of these cases, it is not going to help the home owners in the long run.

In my previous observation with Russia, Indonesia, Venezuela the minute this conversation begins:

Gov't: Your money are NOW BELONG TO US.
Investor: Thanks, I'll SELL WHAT I COULD. ALSO, **** OFF THE NEXT TIME YOU SEE ME TO BORROW YOU DIMWIT.

****ing retard communist bull**** doesn't work in America, Hank.

"...pushing the payment on a typical mortgage from $1,200 per month to $1,550, an increase of $350. "

If an extra '$350' puts folks over the edge, then this is all window-dressing...

Hey, what ever happened to the SIV superfund?

Was it real, or just hype to pump the markets?

My take. Its a charade. Nothing but a PR move. There is no way they can stop this train at this point.

Like trying to boil the ocean with a Coleman stove.

Question, so if they freeze the interest rates, and bernake lowers interest rates subsequently, does that mean they will be paying a higher interest rate?

Teaser Freezer? i think the bartender made me one of those last night. No wonder I got such a bad hangover today.

This is not even rhetoric....its total bull**** manipulation of the media. The effects of spreading rumors with **** like this are for the financial stock prices being held up over the holidays, nothing more in my opinion, not to mention, setting up a BIG BEAR TRAP for short traders who buy into this goofy assed idea, by shorting close in financials more. Cuz when this stupidity is taken off the table, which it will, the financial's stock prices remains artificially high on "Fake Bad news" rendering your short position worthless and a loser trade.

They are trying to crash a Bear christmas party. Reverse "Buffet is going to buy it" tactic.....its a jungle out there man !

Watch what they do....NEVER what they say...so far, nothing has changed and nothing probably will change in the ARM lending fiasco, except the crash which is inevitable.....this is a media released headfake.....I may be full of **** too but I aint trading on this bull**** "trial balloon" plan of theirs...

I think that this move can actually postpone recovery. Now, it might be even harder to get a new loan. This will not restore trust between companies needed to restore credit market.

You bet Ks.

Someone just BB me, saying if anything ever comes in effect off the ARM freeze, a "Common Benefit Insurance" will be enacted for newly originated ARM.

CBI will be in effect given some clauses becoming binding, like house price decline relative to some benchmark, etc. The extra interest payment will be used to protect the funding trust, IO holder, etc. When the clause is in effect, the interest rate goes up even in teaser period until such clause is no longer binding. Basically an inverse formula of the Case Shiller Index if I may venture a guess.

He said no idea of who's backing the idea, but I have very strong hunch it is FRE and FNM.

Does any of you have the illusion this will ENHANCE trust?

RE: CBI

So does that mean they have some how figured out a way to make the "teazer freezer" a doable thing ?

can't believe what I'm reading.
they couldn't possibly make this situation worse - yet they have.

I think we might be missing something.

Here's what I would REALLY look for deep in the guts of these agreements: indemnification of the middlemen.

I'm not an expert---and I hope there may be experts here who can know for sure---but I would suspect there are all sorts of legal clauses in the securitization agreements which could be triggered in one way or another that could cause pain to the investment banks who wrapped these. Let's call them "product liability" lawsuits.

Whaddya want to make a bet that there's some weaseling around which will cram down the value of the bonds to the eventual buyer (i.e. Joe Sixpack's and Jun Cheng's pension fund) while letting the middlemen get off with their massive loot? Just a little somethin slipped in the laws & "contracts" in the final editing?


Maybe that #ifdef POWER code block of Goldman's was just executed, hmmm ?


Sometimes my tinfoil hat might be a little too tight, but I wonder if all the models they run on this scheme predict a postponement of the inevitable blowup until Jan 2009.

I guess that's what it means to be "contained", right? If you "contain" an explosive, like in a metal case, you get shrapnel when it blows up.

well it's not so frozen is it now, margin?

cut 1% up 1.5% by that scheme.

RE: cut 1% up 1.5% by that scheme.

Can you explain a bit in detail ? Sounds cryptic to my brain even with a good morning coffee.

So let's say it's frozen at 5% forever for the 2/28.

But if there is something like CBI, let's say the formula is max ( 0, 0.25 x (5% - CaseShiller%) ) adjustment then you can see how in declining housing price and a risk of government seizure this could help mitigate the interest rate shortfall in the future. At the time when it's supposed to be teaser rate no less. Fire against fire.

Well ****, while we're mandating an interest rate, let's just go ahead and mandate the length of that contract as well.

Hooray - my 30-year loan has become a 35-year loan paying less per month but the NPV will work out the same when we assume a constant rate of inflation for our NPV calculations! You're OK with that, China, right? RIGHT?


Good times.

The people defaulting now are the ones that lied on their applications, lied on their income, had no intention of paying back the loan, had every intention of making a profit on their home appreciation, and now we are going to protect and promote the fraudsters and home flippers, while level headed people bought a much smaller home then they wanted because they knew they could not afford a bigger home, yet the no income, no doc, no verification leach on society is now in their mcmansion and will have a lower interest rate? Either the tax payer or the lender will pay for this. The lenders will go along with this fraud because they will be allowed to book this phantom income as neg amortization loan... America is a fraud.

The Paulson Jubilee. What a guy. You get interest forgiveness but the debt stays. Even Jesus would be proud.

No one here really knows the details of Paulson's plan. However, the FDIC proposal is outlined in this speech describing "A Proposal for Loan Modification":
| http://www.fdic.gov/news/news/speeches/c....

Quote:

The current problem in subprime mortgage lending arose with the rapid growth of 2- and 3-year adjustable rate subprime hybrid loans after 2003. Between year-end 2003 and mid-2007, some 5 million of these loans were originated. Of these, slightly over 2.5 million loans with outstanding balances of $526 billion remain outstanding.

The typical structure of these loans is to provide for a starter rate (typically between 7 and 9 percent), followed in 24 or 36 months by a series of steep increases in the interest rate (often totaling 5 percent or more) and a commensurate rise in the monthly payment. Almost three quarters of subprime mortgages securitized in 2004 and 2005 were structured in this manner, as were over half the subprime loans made in 2006. Most of these loans also imposed a prepayment penalty if the loan was repaid while the starter rate was still in effect.
...
It appears that subprime loan portfolios can be split into three basic groups: the small subset of loans that can be expected to perform after reset without modification, loans that became past due under the starter rate and probably cannot repay even if they are modified, and loans that have remained current prior to reset, but will likely not remain so after reset without modification.

... For loans that remain current or less than 60 days delinquent, only 3.3 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. ....

With regard to that small subset of borrowers who have the ability to repay without modification, these loans should continue according to their contractual terms. As for loans that are already past due and cannot reasonably be expected to repay, even with restructuring, there may be no alternative except for foreclosure. The same is true for loans that were made under fraudulent circumstances or to speculators.

A key issue is how to address the mortgage loans for owner occupied properties where the borrowers are current on their payments but will not be able to maintain the payments following reset. If servicers do nothing and allow all of these loans to reset to the full contract rate, the result will be the eventual default and foreclosure on hundreds of thousands of additional loans.

For this group of borrowers, Chairman Bair has recommended that servicers take a systematic and streamlined approach to restructuring these loans into fixed rate loans at the starter rate -- which is already above market rates for prime loans. These loans should be evaluated to determine the borrowers' ability to make the payment following reset and the net present value (NPV) of the loan modification should exceed the NPV of allowing the loan to go into foreclosure. Loans that are current after two years have clearly demonstrated a record by the borrower of a consistent willingness and ability to repay at the starter rate, which bodes well for their ability to repay at that rate over the long run.
...
Correcting Misconceptions about Mortgage Restructuring

Let me turn now to a number of misconceptions about the impact of Chairman Bair's loan modification proposal and explain how the proposal would work.

Misconception: Restructuring Will Create a Windfall for Subprime Borrowers

Some have expressed concern that restructuring subprime loans to a fixed rate of interest at the starter rate will result in a windfall for subprime borrowers. This misconception is based on the belief that the starter rates for these loans are similar to the low 1 to 2 percent "teaser" rates that were aggressively advertised for prime borrowers. In fact, of subprime hybrid mortgages originated in the first quarter of 2006, the average starter rate was 8.28 percent, which exceeded the average rate on subprime fixed rate loans made in that same quarter (7.93 percent), and was well above rates paid on prime fixed rate loans. These subprime borrowers will continue to pay higher subprime rates even after restructuring.

Misconception: Restructuring Will Deny Investors Their Expected Return

Another popular misconception is that restructuring will deny investors a large stream of interest payments that would rightfully accrue to them after the loans reset to the full contract rate. The reality is that very few hybrid borrowers actually remain in the pools after reset and pay the full contract rate. Among such loans made and securitized in 2003, only one in 30 continues to pay at the full contract rate after four years.

Historically, few subprime hybrid loan holders have actually held these loans long enough to be paying the extremely high post-reset interest rates. The whole game was to improve one's credit score and move up to a prime loan, or refinance with another subprime loan. The second point of FDIC rebuttal does, I believe, correctly point that out. But the rebuttal does not mention that early payment penalties are an important stream of income for these deals.

I'm really interested in how the loss of early payment penalties affects the deal value. Does anyone here have info on that point?

Suppose I were an investor holding a single adjustable rate subprime loan. If this loan were about to reset and I knew that the mortgagee would then default, I'm quite sure I would rather forego the rate hike and hope he would continue paying off the mortgage. Who wants a repo on their hands in this environment? I would hope to recover as much of the principal as possible. Who knows, things may improve sometime in the future. Of course, this would lock up my money much longer than I had anticipated. I say that, because this type of mortgage was sold in the expectation that the mortgages would mostly be refinanced before the rate hikes. I would also unhappily forego the early payment penalty.

Beause different tranche holders have somewhat different interests, its difficult to generalize from my example to the structure deal. But I still think that this proposal would be in the interest of most tranche holders. So I'm more sceptical than some of you that tranche holders will oppose such a restructuring plan.

Of course, this only delays house price discovery. House prices would not have risen so high if such poor loans had not been available. They are no longer available. This is not limited to subprime, but also risk-layered Alt-A, etc. The houses have lost value. So have the riskier loans that were made up until the music stopped. A lot of people, house buyers and note holders, would be happy to put off this price discovery for as long as possible.

Alan