From the January 01, 2008 issue of Futures Magazine • Subscribe!

Reprieve for borrowers?

Media coverage of the subprime crisis often centers on confusing new securitized-debt obligations, and how mechanisms to price them were so wrong that it led to massive losses for dealers. But behind those bundles of bad debt, and lost in the discussion, are the individuals having trouble paying off those loans, many of which will reset to much higher rates in 2008.Treasury Secretary Henry Paulson worked out a plan with a group of market participants to avoid preventable foreclosures and to minimize the impact of the housing downturn on the U.S. economy.

“I don’t think he’s doing a bailout,” says Kimberly Amadeo, publisher of WorldMoneyWatch.com. “The biggest benefit of the plan is that it could restore confidence to the market and to the economy. Subprime mortgages and other collateralized debt obligations are so complex that no one knows what the impact is going to be.”

In a presentation to the Office of Thrift Supervision National Housing Forum, Paulson said that half of foreclosures occur without borrowers talking with lenders or a mortgage counselor. In response, a coalition of mortgage servicers, counselors and investors, called the HOPE NOW Alliance, will begin reaching out to mortgage holders 120 days prior to their interest rate adjustments and begin working with them to avoid preventable foreclosures.

The Treasury plan will focus on helping homeowners with steady incomes and clean payment histories who could afford the introductory mortgage rate but not the higher adjusted rate. But what will this mean to the fixed income market? “This is not going to keep bond rates down,” says Peter Kefalas, head of research at Denali Asset Management. “We saw a nice bounce [in early December],” he says, and coupled with the rebounding equities in the first week of December, he takes that as a sign of increasing stability.

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