Not one to interfere with the free market, President Bush via Treasury Secretary Henry Paulson has come up with a scheme that looks good on paper, but rewards mortgage lenders for poor past behavior while leaving 2 million consumers at risk.
While lenders may voluntarily keep adjustable rates in place for 5 years, they do not have to convert them to fixed rate mortgages that would provide stability to the consumer in the long run. What this means is that the consumer's mortgage may not be raised (if the mortgage lender voluntarily agrees and the person have never missed a payment), but after 5 years their mortgages may balloon anyway.
From the AP
The Bush administration has come up with a plan to help strapped homeowners facing a daunting jump in their monthly mortgage payments.
The proposal, reached in negotiations led by Treasury Secretary Henry Paulson with the mortgage industry, would freeze introductory "teaser" rates on subprime mortgages, preventing them from resetting to higher rates for five years. White House deputy press secretary Tony Fratto said it would help "potentially a little more than a million" people who can afford payments with their introductory rates, but not if they jump to higher rates.
He said it was voluntary, and did not represent federal intrusion into the private market.
President Bush, who was to announce the agreement after a meeting with industry leaders at the White House on Thursday, has stressed that the deal is not a bailout because no government money is involved.
The effort is aimed at stemming a threatened wave of foreclosures in coming years as 2 million subprime mortgages _ loans provided to borrowers with spotty credit histories _ reset from their introductory rates of around 7 percent to 8 percent to levels as high as 11 percent, adding hundreds of dollars to the typical monthly payment.
The mortgage companies will offer to freeze the loans at the lower introductory rates as long as the borrowers did not miss any payments at the lower rate.
The program is the biggest effort yet to deal with a tidal wave of mortgage defaults, which have piled up billions of dollars in losses for big banks, hedge funds and other investors while roiling financial markets around the globe. The defaults are the latest economic blow from the worst housing slump in more than two decades. Some economists think the housing bust may become severe enough to push the country into recession.
Two Democratic presidential contenders, Hillary Rodham Clinton and John Edwards, complained Wednesday that, given the risks to the economy, Bush's proposal did not go far enough. They proposed their own plans that would not only freeze mortgage payment rates but also declare moratoriums on further foreclosures to add pressure on lenders to reach at-risk homeowners.
The financial services industry applauded the administration for negotiating a plan that will allow free-market forces to operate. The hope is that the five-year freeze will buy time for the housing industry to work down record levels of unsold homes and for sales and prices to start rising again.
A housing rebound would enable homeowners to refinance their current adjustable rate mortgages into fixed-rate loans with more affordable monthly payments.
More from the NY Times
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