Finally, there is some good news for the troubled mortgage market. The Wall Street Journal reported that the White House and the mortgage industry are close to a deal that would temporarily freeze interest rates for some sub-prime home loans on primary residences. Right now they are talking about a rate freeze for up to 7 years. The negotiations are on going.
Deutsche Bank reported on Friday that Henry Paulson's plan would cover homeowners who are facing their first adjustable rate increase and have some equity in the property. This group would include 1.2 million loans valued at $258 billion or about one third of outstanding "first-lien" sub-prime loans. Hopefully, this will allow homeowners to weather the storm.
The next hurdle is to get the investors who bought into funds of bundled sub-prime loans to accept this rate freeze. In my opinion, these investors do not have many options. I have read estimates that each foreclosed home could cost these investors between $50,000 and $100,000. Therefore, it would better for the investors to accept a loss from a rate freeze than risk having these loans go into total default.
I will keep you informed of the latest developments.
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