Wednesday, December 5, 2007

Paulson's Four Categories - Now We Need the Numbers

What would be interesting would be to understand the relative proportions that he thinks are in each category.

How many are affording 11% mortgages?

More importantly, how many can re-finance to fixed rates?

That's a number I'd really, really like to know, because it is an indicator, possibly, of how many people got "sold" an adjustable-rate nightmare. (I'd be willing to wager that figure as high as 66% of all the categories). Refinance applications are soaring, in the current quarter, if that is any indication ...

Hank Paulson's thinking on how to analyze the problem:

While the reality is a bit more complex, in the interest of simplicity, there are four categories of subprime borrowers.

  • There are those who can afford their adjusted interest rate; these homeowners need no assistance.
  • There are also a substantial number of homeowners who haven't been making payments at the starter rate on their subprime loan and may not have the financial wherewithal to sustain home ownership; some of these homeowners will become renters again.
  • A third category of homeowners might choose to refinance their mortgage - putting them in a sustainable mortgage while keeping investors whole. This is the first, best option. Servicers should move quickly to assist those who can refinance.
  • And the fourth category is those with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate. We are focusing on this group, determining who they are and what steps may appropriately assist them

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