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President, critics agree proposal isn’t perfect

The plan negotiated by the Bush administration to freeze the low introductory rates on subprime home loans appears likely to help only a fraction of the homeowners who face huge jumps in their mortgage payments.
/ Source: The Associated Press

President Bush acknowledges it’s “no perfect solution.” Treasury Secretary Henry Paulson says it’s “no silver bullet.”

The plan negotiated by the Bush administration to freeze the low introductory rates on subprime home loans appears likely to help only a fraction of the homeowners who face huge jumps in their mortgage payments.

After that, they could be in the same position again.

Homeowners dialing up their mortgage company to get their current rate frozen could be disappointed. The White House plan doesn’t force mortgage companies to give eligible homeowners a break. It is voluntary.

President Bush, announcing the initiative Thursday, said 1.2 million homeowners could be eligible for relief, which includes the rate freeze and helping people refinance into more affordable mortgages. The Center for Responsible Lending, a group that promotes homeownership and works to curb predatory lending, estimates that only 145,000 households will qualify for the rate freeze. The criteria is too strict, it says.

The White House plan is aimed at stemming foreclosures that have shot up to record highs as the housing market has gone from boom to bust.

Subprime borrowers — those with tarnished credit or low incomes — have been hardest hit by the meltdown. Initially low interest rates that reset to much higher rates have clobbered those borrowers. Nearly 2 million adjustable-rate subprime mortgages will reset from introductory rates of around 7 percent to 8 percent to much higher rates this year and next, raising the specter of even more people being forced out of their homes because they cannot keep up with their monthly payments.

Rising home foreclosures are a headache for politicians and a danger for the economy.

The White House’s plan aimed to curb future foreclosures but there are questions about how effective it will prove to be.

The rate freeze offer would be available only to people who have not missed any mortgage payments at their introductory interest rate. It also would apply only to loans taken out between 2005 and July 31, 2007 and are scheduled for rate boosts between Jan. 1 , 2008 and July 31, 2010. To ensure that speculators don’t get the break, the rate freeze offer applies only to people living in their homes.

With these restrictions, 49-year-old Debra Spriggs of Grand Blanc Township, Mich., a single mother of six, hopes she can benefit from the Bush plan but isn’t sure if it will apply to her.

The retired General Motors Corp. worker said she pays nearly $3,000 a month for her mortgage, including interest and late fees, after missing one payment and renegotiating with her lender.

“It’s scaring me to death,” said Spriggs, whose children include two with special needs. “I want to do what I need to do so I can get back to where I’ve been,” she said. “I’m praying this market turns around so I can get some refinancing.”

The idea behind the administration-negotiated plan is that the five-year freeze will buy time for housing sales and prices to start rising again. Such a rebound would enable homeowners to refinance their current adjustable rate mortgages into fixed-rate loans with more affordable monthly payments. But some people who want to buy homes and have been priced out of the market are upset there’s no help in sight for them.

Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee who is vying for his party’s presidential nomination, complains that the White House plan amounts to “little more than financial wallpaper.”

Dodd said the criteria by which distressed homeowners are eligible for relief “shuts out hundreds of thousands of borrowers who are either in, or shortly will be facing, default in 2007 because of the abusive exploding adjustable-rate mortgage loans they were sold.”

Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association in the third quarter, a record 4.72 percent of them entered the foreclosure process during that period. At the same time, a record 18.81 percent of the subprime adjustable-rate loans were past due.

A call was placed to the hot line set up to help distraught borrowers — 1-888-995-HOPE — to find out how to take advantage of the 5-year rate freeze. The caller was advised that “the criteria for that is going to be pretty slim” and that there are “lots of hoops to jump through.”

Meanwhile, there’s still the possibility that investors, who were counting on bigger returns from the higher rate resets, will balk at extending the duration of the lower rate.

George Miller, executive director of the American Securitization Forum, whose members include investors, ratings agencies and other financial players, backed the White House’s effort and developed streamlined procedures for lenders to follow when sorting through borrowers’ requests for relief. He was hopeful lawsuits could be avoided but he struck a note of caution.

“Certainly, there is no complete insulation from legal exposure,” Miller said.