Bush’s decision to step in comes as forecasts predict delinquencies will worsen and lenders will clamp down on who they lend to, creating more economic head winds. Thos with sub-prime loans could send as many as 1.4 million loans into default and will be overwhelming for the FHA and the administration who state that the program could help an additional 80,000 homeowners refinance.
The plan projects "marginal results relative to a problem that is growing and likely to continue to grow through the next year," said Michael Youngblood, a managing director at FBR Investment Management in Arlington, Virginia. "One is grateful that 80,000 people will keep their homes, but you will forgive the markets for not over-reacting."
The ABX-HE 2007-1 "BBB-" sub-prime loan index rose 2 points to about 34.5 on Friday after the Bush plan hit the media. The index, one of the only visible ways to track prices in the opaque, over-the-counter market, has lost more than half its value since May and hit a record low close at 31.96 on Thursday, according to Markit Group Ltd.
Investors in the $7.2 trillion mortgage market have been battered in the past year as the rate of delinquency on loans of sub-prime quality has surpassed expectations. Rising monthly payments for millions of homeowners and reports of falling home prices have left them girded for more losses.
The bond market is still being flooded with loans made in 2006 when underwriting had grown particularly lax, Youngblood said.