Falling short-term interest rates have diminished the need for a much-heralded government plan to help homeowners whose mortgages were due to reset at more expensive levels.
That’s not necessarily bad news for homeowners, industry executives say, because mortgage rates are not jumping up as dramatically as policymakers had feared last year. Foreclosures, however, are continuing to rise — reflecting loose lending standards and risky varieties of mortgages prevalent at the height of the housing boom, which has since turned to bust.
Statistics released Thursday by Hope Now, a Bush administration-organized mortgage industry effort to help at-risk borrowers, show that among a sample of 140,000 subprime mortgages with two or three-year introductory rates that adjusted to higher levels in January or February, about 4 percent — or 5,600 were modified.
About 60 percent of those modifications were for five years or longer — the length of the interest-rate freeze that President Bush announced in December.
Subprime loans have defaulted in increasing numbers over the past year, sparking a broad credit crunch that has affected numerous parts of the struggling economy. Meanwhile, a series of interest rate cuts by the Federal Reserve has led to a decline in a key interest rate used to set rates on subprime loans.
A year ago that rate, known as the London Interbank Offered Rate, was at 5.36 percent. By Wednesday, it had fallen to 2.68 percent, according to Bankrate.com.
Mortgage industry executives say that’s good for borrowers. “These homeowners’ monthly payments are holding steady and there is no payment shock,” Faith Schwartz, executive director of the Hope Now effort, said in a statement.
Far more subprime loans — about 60,000, or 43 percent of the sample — were paid off through a refinancing or sale, the Hope Now group said.
“Every single subprime borrower who has an adjustable rate mortgage is getting help now” through lower rates, said Tom Deutsch, deputy executive director of the American Securitization Forum, the industry group that developed the rate-freeze guidelines,
“If borrowers aren’t experiencing any significant kind of rate shock, there is no need to modify” their loans, he said in an interview last week.
Consumer groups, however, say that rising foreclosures stem from the prevalence of high-rate loans that were designed with little regard for borrowers’ ability to pay, not just from interest rate adjustments.
More than 223,000 homes across the nation received a foreclosure-related notice in February, according to Irvine, Calif-based foreclosure listing service RealtyTrac Inc, up 60 percent from a year earlier.
In Senate testimony Thursday, former Treasury Secretary Lawrence Summers predicted more than 2 million foreclosures are coming over the next two years, and up to 15 million homeowners will owe more than their house is worth, as house prices continue to fall.
The congressional Joint Economic Committee released a report Thursday projecting that U.S. home prices will drop by more than 11 percent through 2009, leading to a $2.6 trillion drop in housing wealth.
Consumer advocates and Democrats say efforts by the mortgage industry and the Bush administration are inadequate. They are pushing for a broader government response.
“We’re simply running out of time,” said John Taylor, president of the National Community Reinvestment Coalition, a consumer group in Washington. “If the administration doesn’t back some very serious foreclosure prevention initiatives ... we run the risk of prolonging the economic downturn.”
Sen. Charles Schumer, D-N.Y., the Joint Economic Committee’s chairman, said in a statement that “the nation’s foreclosure and housing crisis is the central cause of this recession, and unless we address it quickly, millions of American families will continue to see their economic fortunes decline.”
The Hope Now group’s statistics show more than 133,000 foreclosed homes were sold in January and February alone, a number approaching the 147,000 foreclosed properties that sold in the last three months of 2007.
The group also said 1.2 million borrowers have received some form of loan workout from last July through February. Of those, 72 percent were helped through repayment plans, which help borrowers get back on track after missing a few payments. The remaining 28 percent were helped through permanent loan modifications, such as lower interest rates.
“This data shows the industry is making progress,” Treasury Department spokeswoman Jennifer Zuccarelli said in an e-mail. “Many subprime homeowners who have been able to make their initial payments are avoiding foreclosure.”
The industry’s willingness to modify loans has grown this year. In the first two months of 2008, loan modifications grew to 37 percent of all loan workouts, according to Hope Now’s statistics. Members of Hope Now include Bank of America Corp., Citigroup Inc., Washington Mutual Inc. and Wells Fargo & Co.