Is the big news this week the subprime rate freeze plan announced by the Bush administration? Or is it another political red herring? At first glance, it sounds really good, but let’s look a little further into the story. The number of people who will qualify for the five-year rate freeze on their subprime adjustable-rate mortgage is relatively small, up to 600,000 Nationwide. It is estimated that over 2 million homes in the US are going to be at risk of foreclosure in 2008, as the teaser loans taken out in 2006 reset.

Borrowers who can qualify for the interest rate freeze have little or no equity in their homes and credit scores less than 660. The likely-hood of foreclosure for these people is still high.

Investors who were counting on making a profit off of the rising interest rates will end up losing on their investment and might deter investors from buying those bonds in the future, and that could make it harder to get mortgages. The impact could be huge.

In an article in the San Francisco Chronicle, G. Marcus Cole, a professor at Stanford Law School, stated “It strikes me as more of a rhetorical or political device than a financial device. It provides some type of cover for servicers that want to take that step but need some source of authority,” But it also sends the wrong message, “It gives a sense that the government ought to be engaged in rescuing borrowers in this particular category. It also conveys the message that foreclosures are a bad thing or unhealthy. Foreclosures are a natural part of market discipline. If you take out the impact of foreclosures you have reduced the stick that stands behind the commitment to pay on the mortgage. I would think this would make the markets nervous. This is very interventionist, even to the extent it’s voluntary.”

This Week’s Real Estate Insight:
Maybe the President should have been wearing his fight suit when he announced this one, only time will tell…

While there is still a lot of bad news to report in the housing sector, there is a lot of good news too that is buried on page 70 or not reported at all. Today for example, there was an article in an area paper about how many State’s pension funds have taken a hit from the subprime fallout. Following the loses in the Florida State Pension Fund, Rhode Island General Treasurer Frank Caprio had shifted $1 billion in investments out of a fund that invested in mortgages and credit-card backed securities, including some securities that were unrated. In an interview on WPRO AM this morning, Caprio stated that his office had been interviewed for this article, but there was no mention of Rhode Island at all, instead it focused on the problems in Massachusetts and Connecticut. So, if the media is not going to report good news I thought I would put together some of the good news I came across this week:

1: Freddie Mac reported Thursday that the rate on a 30-year fixed-rate loan averaged 6.26 percent for the week ended Nov. 1 down from 6.33 percent last week. The 30-year rate has not been this low since the week ending May 17, 2007. Last December the 30-year rates averaged 6.31 percent.
2: New single-family home sales rose 1.7 percent in October. The first rise seen since April.
3: In the third quarter, 93 out of 150 metropolitan areas show increases in median existing single-family home prices from a year earlier, six areas with double-digit annual gains and 21 metros showing increases of 6 percent or more.
4: In the condo sector, metro area condominium and coop prices show the national median existing condo price was $226,900 in the third quarter, up 2.0 percent from $222,500 in 2006. Forty-one metros showed annual increases in the median condo price.

This Weeks Real Estate Insight:
When the scary headline reads: “Twenty-five percent of the subprime mortgages are not performing.” Think about this – Subprime’s comprise 25 percent of the market, of which 75 percent are performing. 25% X 25% = 6.25 percent….sooo….93.75% of all mortgages are performing! Not so scary now, huh?