FDIC pushes ARM rate freeze

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We find this item from CNN Money both interesting and a bit confusing, so we’ll be asking your help later, but here goes: ‘The country’s chief bank regulator publicly proposed that mortgage lenders and servicers permanently freeze interest rates on sub-prime adjustable-rate mortgages (ARMs) for many homeowners.’

More: For owner-occupied homes where the loan is current, ‘’Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it,’’ Federal Deposit Insurance Corp. Chairwoman Sheila Bair said in prepared remarks at an investors’ conference.’

More from Bair’s speech (read the whole thing here): ‘And let’s be honest about it. Hybrid ARMs were never made based on the assumption that the borrowers would be able to make the payment once the loan reset. They were designed as two or three year ‘bullets’ ... with the assumption that home appreciation would allow the borrower to refinance at, or before, reset. Given current conditions in the housing market, this business model is no longer viable, which should come as no shock to anyone.’

We have so many questions we’ll just lay them out:

• Are lenders and servicers likely to seriously consider an appeal like this?
• When a suggestion like this comes from a regulator, is it an implied threat?
• Do servicers have the discretion to modify large numbers of loans? Bair said she believed they did. Do they?
• Is it fair? Why freeze rates on only sub-prime ARMs? Why not all ARMs? And what about relief for 30-year fixed borrowers who have higher rates than these frozen rates?

We look forward to your thoughts on this.
Hat Tip: MyLessThanPrimeBeef