Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups: those who can continue to make their payments even if rates rise, those who can't afford their mortgages even if rates stay steady, and those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates. Only the third group would be eligible for help. The creditors are likely to look at whether the borrowers have equity in their homes, despite falling house prices, and whether their incomes are holding steady.Countrywide's stock rallied strongly on the news, jumping nearly 20 percent in early trading; MarketWatch reported that analysts have already begun upgrading the company's stock, with Fox-Pitt, Kelton moving shares of Countrywide to "outperform." A blog at the WSJ carried economist reaction, with David Ader at RBS Greenwich characterizing the potential plan as a "big deal, maybe." (Paul Krugman also actually coughed up compliments for the Bush administration over this, which in and of itself should be news.) I'll post some commentary this weekend on the proposed bailout, but suffice to say I'm in line with Ader based on what I've read so far. It's tough to say how this is going to play out right now, but HW readers likely already know how I feel about any borrower bailouts and the long-term effects thereof.
Report: U.S. Government, Banks Nearing Agreement on Borrower Bailouts
Numerous media reports this morning suggest the Federal government is nearing an agreement with a number of the nation's largest banks to freeze ARM resets for a certain chunk of borrowers. The Wall Street Journal reported Friday that the plan being devised is part of the HOPE NOW Alliance and a change in strategy by Treasury Secretary Henry Paulson, who had previously been against intervention. Some details on how this is supposed to work: