President Bush Reveals Sub-prime Relief Plan: What do you think?

The Bush Administration today released the much-anticipated sub-prime loan plan that provides for lenders, investors and loan servicers alike to voluntarily freeze “teaser” interest rates on a select number of sub-prime loans made from January 1, 2005 to July 31, 2007 for up to five years. This agreement does not include any funding or bailout from the government (e.g. tax payers), but some fear that this may be the first step toward deeper government involvement in the credit meltdown. While the agreement will provide relief to some borrowers, the qualifications for relief are somewhat unclear (I'll keep this post updated as more details emerge). For example, to qualify, a borrower must have a loan that was originated during the above timeframe, must still live in the home, must be able to afford the current payments (while proving they won't be able to afford the payments once their rate adjusts upward), and must have less than 3% equity in their home.

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As a general rule, P2P-Loans.com has mixed feelings about the government getting involved via increased regulation in just about anything that the free market can sort out due to the laws of unintended consequences (for example, the Alternative Minimum Tax). P2P-Loans.com does believe there were some unscrupulous mortgage brokers that gave bad advice to borrowers, but P2P-Loans.com strongly believes that individuals need to take responsibility for their own actions. If you signed the mortgage documentation, you should have read it to be sure it said what your broker told you it said! If you didn’t, shame on you and we hope you learned a valuable lesson for the next time.

This deal, however, is not a bailout as it is being willingly agreed to amongst private parties (lenders, loan servicers and others) at the “urging” of the US treasury department and the White House, and not as a result of new legislation, regulation or subsidy. Additionally, the net result of this agreement is simply to accelerate what the banks were likely going to have to do for many borrowers anyway (cut them a break and offer a new deal). As the number of foreclosures continues to climb, lenders/servicers were going to have to eventually face the music and begin to cut borrowers a break through adjustments to their loans. After all, it is a far superior outcome for the lenders to keep a loan performing (even if it is at a lower rate) versus foreclosing on a property.

So Why Are the Banks Willing to Agree to This?
As stated above, P2P-Loans.com thinks they were going to have to end up doing something like this at some point anyway (and, by many accounts, they are already renegotiating a number of loans with late payers). But, the real reason, we think, lies in the fact that the financial services companies are being increasingly attacked by Congress (principally Democrats) as the banks/mortgage companies and Wall Street make the most convenient scapegoat for this whole mess (the story goes something like this, “greedy, self-serving, wealthy financial types lied to millions of innocent borrowers, stole their money and now want to take their house and kick them out on the street,” etc.). By agreeing to this type of deal, the lenders buy themselves some political cover (and time) to stall or eternally defer some nasty legislation working its way through the Democrat-controlled Congress. In addition, the banks do get to slow the pace of foreclosures and, hopefully, the rapidly declining value of their collateral. This is just one idea, keep in mind, but it makes some sense.

So, what do you think? Please submit your comments on this difficult issue.

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