Friday, December 07, 2007

My First Anti-Bush Post

I generally try to stay away from Bush-bashing, not because I like the guy, but because it tends to be tedious and the lefties get way too over-wrought.

However.

I saw this article and was somewhat appalled. As a real estate attorney, I'm somewhat aware of how interest rates are right now, I know something about sub-prime lending practices and adjustable rate mortgages. Now it appears that the freeze will be a reality.

Rate freezes sound like a great deal. And they are, for debtors. In the short term. The problem is that the purchasers of those debt instruments are being deprived of their property rights. And that is going to chill the repurchase market for home loans for quite a while. It's politically attractive because the people who benefit will know who to thank. However, everyone who borrows against their house from now to the forseeable future will wind up paying for it in the form of higher borrowing costs.

I know some of my readers will be wondering why, if it's going to chill the market, Countrywide is so keen on it. Countrywide does not hold the loans. They merely originate them. When you borrow from Countrywide, they resell your note to someone else. If the property goes into foreclosure, then the holder may be able to force Countrywide to buy back the note. Which leaves Countrywide owning property that is less than what it originally appraised for.

While this proposal will hurt Countrywide's origination business, it should substantially reduce their liability for loan defaults. So, in the short run, it's a very good deal for Countrywide. But how good a deal is it for the pension funds that are the major holders of ARM notes?

Addendum:

To get a handle on how things are for Countrywide, I decided to see how they did in October in Fulton County, GA (largest county in Georgia). Countrywide Home Loans, Inc recorded 47 security deeds for the month of October. In Georgia, mortgages are not typically used, so security deeds are. No one but real estate attorneys calls them security deeds though. Everyone else calls them mortgages.

Countrywide foreclosed on six properties during the same time period. So their business is down and they're having to buy back a fairly high percentage ( 13%) of the loans they are currently making. No wonder they're eager to stem the tide of foreclosures.

2 comments:

Andrew said...

It's amazing how often politicians violate laws over which they have no control. In this case, the law of 'supply and demand'. It makes as much sense as making laws against gravity.
But then, violating basic economics is a common theme in Washington.

Matthew said...

Agreed.