A couple of things I’m kind of curious about and will try to get answers for over the next few days:
(1) If you’re a bank that’s holding some of these mortgages on the balance sheet – as opposed to securitizing them and selling them off – how does this rate freeze affect the the loan value on the balance sheet? Technically this is a “troubled debt restructuring” (TDR), thus the regulators will require the loan to be revalued (lower, obviously) based on the new loan terms. While this revaluation may be above the loan’s value in the sale market, it will certainly be materially lower than the value it’s currently held at on the balance sheet. Enough of these (and clearly there are a lot of them) and you run into capital adequacy issues.
(2) I’m assuming that this rate freeze will be some kind of a mandate from the government such that the ultimate holders of these securities will just have to suck up the (much) lower coupons – that is, the servicers won’t be penalized for merely enforcing the government’s plan. So, if we’re in a liquidity crisis, how does this really help? Potential buyers of MBS (providers of liquidity, that is) will definitely not want anything to do with these structures for years to come considering what the government is mandating. This will be a disaster for anything but GSE-conforming mortgage paper for some time to come.
I’m not saying that these measures won’t help a little bit at the margin, but I think it will be fairly limited when the dust settles and we see that as a percentage of those in trouble, only a relatively small number were actually able to avail themselves of this “help.”
