First it’s not a “rate freeze.” Don’t call it that. That’s going to cause a lot of confusion among the muggles.
A better handle is “subprime freeze” although that’s not accurate either.
There is a lot of think-talk out there about the world going to hell in a handbasket because some borrowers are going to be rewarded for their stupidity or their avarice, and what about personal responsibility, etc., etc., etc.
Hey, the lenders aren’t doing this out of the goodness of their hearts, they don’t have any, they are doing it to make more (lose less) money.
If it was in their best interest to stick it to those same subprime borrowers, they certainly would. It’s just business, madam.
I pretty much agree with this guy’s take on the subprime freeze.
If you change only one variable, and reduce the interest rate paid on performing loans from say 10% to 7%, then the model will spit out a lower valuation. On the other hand, if along with a lower interest rate you also put in a lower foreclosure rate, then you’ll probably end up with a higher valuation, especially if your loss given foreclosure was high enough to begin with. And if the general discount rate you use comes down on the grounds that the mortgage freeze has reduced downside risks to the housing market as a whole, then your model’s valuation will go up even further.
Another factor that may have been included in the lenders’ calculation is the political benefits of this plan. This action taken now might tone down the sweeping legislation that is winding it’s way through Congress during this election year.
This agreement won’t save home sellers but should take the top edge off of the future over-supply peak.