Freeze plan for subprime loans unveiled

President George W. Bush and U.S. Treasury Secretary Robert Paulson unveiled a plan this week to aid financially strapped borrowers in danger of foreclosure when mortgage rates reset in January.

The plan calls for a five-year freeze on the interest rate for some mortgages, expected to affect about 1.2 million borrowers in the United States.

In a speech yesterday, Bush called foreclosure "a terrible burden for hard-working families, and a source of concern for entire communities and neighborhoods across our country," adding, "the rise in foreclosures would have negative consequences for our economy. Lenders and investors would face enormous losses."

Negative effects of a difficult housing market have already been felt by numerous home builders, professional contractors, home improvement retailers, their vendors and those who supply all of them with raw materials.

But the new deal hopes to alleviate strain on homeowners who currently are not delinquent on their mortgages and whose rates have not already reset, preserving that group from financial burden.

Under the plan, qualifying borrowers must live in their homes and have a credit score that is too low for traditional fixed mortgages. Those borrowers still may face a payment hike of more than 10 percent, but otherwise some would have seen their mortgage rates go up as much as 30 percent.

The agreement was reached in talks among federal regulators, mortgage lenders and investors.

"Some lenders made loans that borrowers did not understand, especially in the subprime sector," Bush said in his speech, adding that there is a group of "responsible homeowners" who could still avoid foreclosure with some assistance.

The plan has been criticized by some politicians and borrowers on two main points: first, some politicians have criticized the plan because it does not address borrowers whose rates have already reset; and second, other borrowers who took out more reasonable loans view it as a bailout for those who tried to live beyond their means.

Both the National Association of Realtors (NAR) and the National Association of Home Builders (NAHB) have come out in favor of the plan.

"The dream of homeownership should not turn into a family's worst nightmare," said NAR president Richard Gaylord. He cited "predatory lending practices" as one reason such a plan is necessary. "The loan modification program ... is a good first step in helping deserving families keep their homes.”

Sandy Dunn, president-elect of the NAHB, said the plan will help spur a quicker recovery of the housing market.

“Once we work down the inventory of unsold units and put the credit crunch behind us, demand among both first-time and trade up buyers will return to more normal and sustainable levels," Dunn said.

The announcement came on the heels of a Dec. 6 report that foreclosures in the United States have risen to the highest rate in 20 years.

In the third quarter, delinquencies were at 5.59 percent on a seasonally adjusted basis, up 47 basis points from the second quarter of 2007 and up 92 basis points from last year’s third quarter, according to the Mortgage Bankers Association.

Since the third quarter of 2006, the foreclosure starts rate for prime adjustable rate mortgages (ARMs) increased from 0.30 percent to 1.02 percent, and the rate for subprime ARMs increased from 2.19 percent to 4.72 percent. The foreclosure starts rate for prime fixed loans increased from 0.13 percent to 0.22 percent, and the rate for subprime fixed loans have increased from 0.97 percent to 1.38 percent.

“Florida and California are the two largest states in terms of mortgages outstanding and are the key drivers of the increase in the national foreclosure rates,” said a statement from the Mortgage Bankers Association.

While California and Florida together have 36.4 percent of all of the prime ARM loans in the country, they had 42.4 percent of the nation’s foreclosure starts for prime ARMS. Similarly, California and Florida together have 28.1 percent of the subprime ARMs and 33.7 percent of foreclosure starts for subprime ARMs.

“This is the first quarter which registers the full combined effects of the seizure of the nonconforming securitization market, broad-based home price declines, continued weakness in some regional economies and rate adjustments on monthly payments,” said Doug Duncan, chief economist at the Mortgage Bankers Association. “The predictable results are increased delinquency and foreclosure.”