11.24.2007

Please explain

I'm not being a smartass here. I'm honestly looking for an explanation of how this is supposed to work.

Schwarzenegger and the big mortgage servicers decided to freeze rates on ARMs for borrowers in trouble. So you bought a $600,000 house on your $55,000 salary using a 2% teaser rate, and you're gonna be in trouble when that rate resets to 7% next spring. No problem! You can have the 2% rate extended for 5 to 7 years. By that time, you'll be bailed out by a real estate market that will surely be skyrocketing again.

Wait a minute. The servicers (Countrywide and others) don't own the mortgages any more. They have packaged them and sold them to Wall Street, pension funds, hedge funds, etc. How does Countrywide unilaterally declare that that 7% loan is now a long-term 2% loan? Surely the buyer has a right to put the loan back to Countrywide when the agreed terms are no longer in force?

UPDATE 11/26: Today's WSJ explains that servicing agreements do give a lot of leeway for servicers to modify loans:
The nation's mortgage servicers will help determine how many more billions this giant real-estate workout is likely to cost. Under their agreements with mortgage investors, servicers have latitude to decide whether to modify the loans of struggling borrowers or to sell their properties out from under them.

That's going to shut down the packaged loan market even more, now that investors see their juicy yields on ARMs negotiated away.

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