Bush mortgage plan could help some

 

BY TAMI LUHBY | tami.luhby@newsday.com

7:50 PM EST, December 6, 2007

Article courtesy of Newsday

 

A few hundred thousand homeowners will likely find relief in the Bush administration's plan to freeze interest rates, but more than a million struggling borrowers won't.

The centerpiece of President George W. Bush's agreement with the mortgage industry is the freezing of the low teaser interest rates of some subprime borrowers. In announcing the plan Thursday, administration officials acknowledged that the plan is not "a silver bullet," but said it is a significant step to addressing the credit crisis.

Industry observers, however, said the proposal will only help a handful of borrowers in trouble because of its strict eligibility criteria. Estimates range from 7 percent of subprime borrowers, or about 145,000 people, to 12 percent, or about 240,000 people. On top of that, servicers' participation in the program is voluntary. And, investors who bought securities based on subprime mortgages, may not sit back quietly after learning their interest payments won't rise anytime soon.

To be considered for the freeze, borrowers must have subprime adjustable-rate mortgages issued in 2005 through July 30 of this year that will reset between Jan. 1, 2008 and July 31, 2010. They have to live in the home, be current in their mortgage and see a rate hike of more than 10 percent after reset. Also, they have to have a credit score of less than 660 and that score cannot have risen more than 10 percent since the loan was originated. These homeowners will be deemed unable to pay after the reset under the plan.

Those who fit the criteria will have up to five years before they face a reset of their low introductory rate. The rationale is that during this time, borrowers' homes may appreciate in value, their incomes may rise and their credit score may improve -- putting them in a better position to afford the rate reset or to refinance.

Still, experts say, most troubled homeowners will not benefit from this grace period.

"This is a small portion of the estimated 2 million borrowers looking at foreclosure over the next couple of years," said Keith Ernst, senior policy counsel at the Center for Responsible Lending, which expects the plan to help 7 percent of homeowners with subprime mortgages.

Bush's midday press conference came hours after the Mortgage Bankers Association released a report showing mortgage delinquencies rose to a 20-year high in the third quarter. The percentage of borrowers -- both prime and subprime -- who are more than 30 days late on a payment rose to 5.59 percent, or 2.5 million loans. The share of delinquent subprime borrowers climbed to 16.31 percent, or 977,000 loans.

Some 6.89 percent, or 412,728, subprime loans were in foreclosure at the quarter's end, while the total number of loans in that category is 1.69 percent, or 768,000.

The Bush plan will do nothing to assist these homeowners, said Susan Lagville, executive director of Greenlawn-based Housing Help, which offers foreclosure prevention counseling. None of her clients would be eligible since all are at least two months behind in their payments.

"It's going to be helpful, but it won't help those people who really need it -- the ones who've already fallen behind because of a rate adjustment," Lagville said.

In addition to the rate freeze, the Bush administration Thursday said that the plan calls for mortgage servicers to assist borrowers unable to handle a future rate hike by refinancing them into another mortgage with more affordable terms or moving them into an FHASecure loan with the Federal Housing Administration. All told, it said these efforts could help 1.2 million people.

Some 35,000 people have refinanced into FHA Secure loans since the program debuted in late August, the administration said yesterday. It expects another 300,000 to do so by the end of 2008. FHASecure allows homeowners who have fallen behind on their payments after a rate reset to obtain an FHA-insured loan provided they meet certain criteria. This may help some homeowners who don't otherwise qualify for refinancing.end opt trim

But because participation in the plan is voluntary, the overall impact of the Bush plan remains to be seen. A Moody's Investors Service study this fall found that despite growing pressure, most servicers had only modified approximately 1 percent of the loans they service that had reset.

Also, the Bush plan could be derailed because investors may not accept changes to the mortgage contracts and put pressure on servicers not to modify the loans. Investors bought mortgage-backed securities expecting the rates to reset and their interest payments to rise. Some industry observers predict yesterday's proposal will spur a wave of lawsuits.

"I can't recall a time when [servicers] would go in and arbitrarily change the contract," said David Olson, president of Wholesale Access, a mortgage research and consulting firm