Given the history I have lived through during the past five decades, it goes against the grain to regard any Republican at all as a sophont possessing functional organs of generation. But I may have to regard Arnold Schwarzenegger not as an overpromising empty suit but as a man. This looks well done--if it holds together. Matthew Garrahan and Krishna Guha report in the world's best newspaper, the Financial Times:
FT.com / In depth - California homes deal to avert defaults: Arnold Schwarzenegger is once again leading US states to action on policy reform ahead of lawmakers on Capitol Hill. The California governor... has now moved to slow the rate of home loan defaults brought on by the collapse in the subprime mortgage market. Mr Schwarzenegger’s deal with four of the state’s biggest mortgage lenders – Countrywide Financial, GMAC, Litton and HomeEq – is “nothing less than jaw-dropping in its ambition and implications.”... Under the scheme, the four lenders will extend for a “sustainable” period their low introductory rates on adjustable subprime loans to homeowners at risk of foreclosure. That would address a serious headache for policymakers – the large number of adjustable-rate home loans taken out at low introductory rates and due to reset at higher rates in the next few years.
Adjustable rate mortgages (ARMs) make up about 30 per cent of all US home loans and are more prevalent in the low-quality subprime market. More than $350bn (£170bn,€236bn) in ARMS will reset to higher rates in the next 18 months. Analysts and ratings agencies alike say these resets will increase the frequency of loan defaults as falling house prices leave borrowers with negative equity and no chance of refinancing. That could hit consumer spending, with knock-on effects on the US and world economies.
Attempts to avert such a scenario by encouraging mortgage lenders and servicers to renegotiate home loans have not gone as far as policymakers would hope. While investors generally agree that in many cases everyone is better off if a loan is restructured rather than going into default, there is great resistance to standardised work-outs based on simple criteria such as type of loan and status of borrower. Many investors feel such standardised solutions will benefit borrowers who can afford to make higher payments, and want to proceed instead on a case-by-case basis, albeit with the aid of standardised systems....
California has not promised any financial or legislative incentives to the lenders, says a spokeswoman for Mr Schwarzenegger. “This is a public-private partnership that does not involve public dollars.” Instead, the agreement is backed by “safety in numbers”. “If only one of these companies was modifying its loans . . . they would lose out to the competition and [house] prices would keep falling. It would be a double whammy,” she said. However, with four mortgage lenders representing 25 per cent of subprime mortgages signing up to the plan, the risk to the lenders has been minimised. The agreement with the lenders will cover only those homeowners “making timely payments”. Beneficiaries will also need to prove they cannot afford a rate rise.