President Bush is set to unveil details of a plan Thursday to help head off a wave of mortgage foreclosures hitting homeowners whose adjustable-rate loans are resetting to monthly payment they can’t afford.
Under terms of an agreement hammered out between the administration and lenders, interest rates would be frozen for five years on certain subprime mortgages, congressional aides said. Bush is expected to make a statement at 1:40 p.m. ET.
The announcement comes as fresh data on foreclosures and delinquencies shows that the mortgage mess worsened in the third quarter. Delinquencies and foreclosures picked up at a faster pace, and the problems have begun to spread to prime borrowers - those with good credit histories.
The White House plan, the result of negotiations led by Treasury Secretary Henry Paulson, would freeze interest rates at lower “starter” rates on many loans that were popular with lenders and borrowers the tail end of the housing boom.
The Treasury plan reportedly will call for a voluntary, five-year freeze on adjustable rates for borrowers with loans made from the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.
The hope is that, by freezing rates, homeowners who are still keeping up with their payments, but face increases thay may not be able to afford, can avoid default and foreclosure. The White House plan would reportedly first assess a borrower's finanical status; only those who can show they won't be able to afford higher payments will be included in the plan. Those who can make higher payments would and those who haevalready fallen behind would not be included.
The White House plan apparently would not go quite as far as those proposed by Democratic presidential candidates Hillary Rodham Clinton and John Edwards, who are focusing on the issue in their campaigns. News of an agreement on the White House plan emerged Wednesday just as Clinton was discussing her own proposal in a speech in New York and then an interview on CNBC.
Clinton's proposal also would impose a 90-day moratorium on foreclosures.
With home prices now falling in many parts of the country, many homeowners are having trouble refinancing their loans because they have little or no equity left — and may owe more than their home is worth.
Paulson, who has been leading talks with regulators, investors and lenders, said Monday that the government wanted to freeze rates to give homeowners and lenders more time to refinance or modify terms of existing loans. Bush is scheduled to speak about the plan at the White House Thursday, and Paulson will hold a news conference with Housing and Urban Development Secretary Alphonso Jackson to provide details.
Loan servicers, who collect payments from homeowners on behalf of investors who hold the mortgages — often through complex securities — have been reluctant to freeze rates because of possible liability from investors who would have to accept lower returns on their bonds. It’s not clear how the Bush administration’s plan would overcome those concerns.
Some two million loans are expected to reset to higher rates and bigger monthly payments in the next two years. Unless the loan terms can be modified, many homeowners will be unable to afford the higher payments. Some borrowers face heavy prepayment penalties if they try to refinance on their own.
The lending industry, meanwhile, has been swamped with borrowers seeking to modify their loans. So far there are no details about how the White House plan would clear the logjam.
Too little, too late?
Until recently, the White House has insisted that the task of modifying of mortgage loans should be handled on a case-by-case basis. In October, Sheila Bair, head of the Federal Deposit Insurance Corp., suggested a more comprehensive approach that would involve freezing rates on loans that are scheduled set to move higher.
But foreclosure attorneys, regulators, mortgage brokers, credit counselors and others involved in helping homeowners head off foreclosures say the complexity of the process will make broad solutions difficult to implement.
“My concern is the administration is quite late coming to the table,” said Michael Barr, a professor at Michigan University Law school and former Treasury official in the Clinton administration. “There's always concern of doing too little, too late, and I'm worried that's what's happening here.”
Community groups also have said the Bush administration’s proposal doesn’t go far enough to head off the wider impact of the rise in foreclosure rates.
“These are systemic problems which require systemic solutions,’’ said Maude Hurd, president of ACORN, a community group working with homeowners who face foreclosure. Hurd said the Bush plan wouldn’t help homeowners who already have fallen behind in their payments or a have lost their homes to foreclosure.
In her speech Wednesday, Clinton proposed appropriating $5 billion to help communities cope with the economic impact of foreclosures. She also called on the lending industry to freeze rates on existing loans for five years.
Clinton said that while Wall Street was not solely responsible for the wave of foreclosures that threatens to crimp U.S. economic growth, it "certainly had a hand in making it worse."
"Wall Street helped create the foreclosure crisis, and Wall Street needs to help solve it," she said.
Clinton said mortgage lenders and brokers who lowered underwriting standards also deserved blame for the housing market mess, as were regulators who failed to provide adequate oversight. And she pinned some of the responsibility on ratings agencies for giving high marks to securities later deemed to be much riskier, and on speculators who bought multiple properties in the hope of profiting from a strong housing market.
Unlike conventional adjustable rates loans, which rise and fall with market rates, the current round of default and foreclosures are coming on loans that automatically reset after the first two or three years, with payments that can jump as much as 30 percent. In many cases, the initial start rates are above market rates for prime loans issued to borrowers with good credit histories. Some borrowers who were sold “subprime” ARMs had credit scores that would have qualified them for better rates.