George's Blog

Hi Blog fans, on Friday Dec. 6^th, Treasury Secretary Paulson unveiled the results of many discussions over the previous few weeks- the ARM Freeze. The plan proposes that certain subprime borrowers who have gotten the ARM loans between Jan 1^st 2005, and July 31^st 2007, and will adjust between Jan. 1^st 2008 and July 31^st 2010, will have their interest rates frozen from adjusting for a period of 5 years.

This proposal covers only subprime adjustable rate loans that are typically fixed for 2 or 3 years, then go to the fully indexed margin and index. The index on these loans is usually the LIBOR index, which currently is 4.502%, to which you would add a margin of 5.5% or 6.00%, and you would get a new rate of 10.00% to 10.5%, that is subject to adjusting every 6 months. Clearly this is a substantial increase in payments. Conventional adjustable rate loans, and the “pick a pay” monthly ARMS do not qualify as subprime loans, and are not covered by this proposal at this time. This is also only for owner occupied properties, and is intentionally not designed to bail out amateur “speculators”, who bought properties without rational analysis expecting to “flip” them a year later for a fat profit, and who are now stuck.

Word has it that the Fed was pushed into action for several reasons, not the least of which was the announcement by California Gov. Arnold Schwarzenegger three weeks earlier that he reached an agreement with four loan servicing companies in California to consider freezing adjustable rate loans. The actual details and mechanics of this agreement remain to be seen, but Gov. Arnold sure got out in front on the PR campaign, which caused more pressure on the Federal Government.

The Democrats are criticizing the proposed Freeze, saying that it does not go far enough, and Hilary Clinton has suggested that the rate freeze should be for 7 years, indicating clearly a true lack of understanding on how the whole process works, and having a knee-jerk reaction, just because she has to say something.

This Freeze proposal will help a good number of people, but ultimately will have very little impact on the overall Real Estate problem, and won’t halt the slide in values in the markets where this is happening. The slide won’t stop until the excess inventories of builders are exhausted, and the people who bought properties on “no down” speculation lose them to foreclosure, and they get absorbed back into the market. This is expected to take anywhere from 1 -3 years depending on the location and general economy.

What is the Real Deal with the Real Estate economy, is it as bad as the Press and pundits say? Stay tuned to the next installment of the Real Deal Guys Blog.

George L. Duarte

MBA, CMC, CMPS

The Real Deal Guy

“Where you find out the Real Deal story”