A subprime relief plan that will freeze interest rates for subprime borrowers who meet certain requirements was announced on Thursday by the Bush administration. Under the plan, mortgage servicers would agree to the five-year rate freeze voluntarily.
The plan will apply to subprime adjustable mortgage loans taken out between January 2005 and July 2007, with rates scheduled to rise between January of 2008 and July of 2010, and applies only to borrowers who have less than three percent equity in their homes and are either current on their payments or no more than 60 days behind. According to the plan, the rate freeze would not include borrowers able to handle higher payments or those unable to make payments even under their current lower rate.
President George W. Bush says the subprime bailout became necessary because "the rise in foreclosures would have negative consequences for our economy." But he also spoke of the need to have limits.
"Lenders and investors would face enormous losses," Bush said in an afternoon press conference. "So they have an interest in supporting mortgage counseling and working with homeowners to prevent foreclosure. The government has a role to play as well. We should not bail out lenders, real estate speculators, or those who made the reckless decision to buy a home they knew they could never afford."
The news of the rate freeze comes on the same day that the Mortgage Bankers Association (MBA) announced that foreclosures had shot up to an all-time high in the third quarter.
Mark Zandi, chief economist for Moody's Economy.com, says the rate freeze is a "good step in the right direction but a bigger step may need to be taken very soon."
"This is not enough," Zandi told BUILDER Online. "While it is good in theory, I think in practice, it will have a limited impact." Zandi adds that the rate freeze will only help 250,000 households--there are an estimated two million households facing subprime resets.
Brian Bethune, an economist with Global Insight, a Massachusetts-based economic and financial analysis firm, says the rate freeze plan may lack details but "the intent and purpose are sound."
"Both investors and servicers in the mortgage industry generally want to work with borrowers to avoid foreclosure," Bethune said in a note. "Borrowers who have been current in their payments but could default after reset, for instance, may be able to work with their lender or servicer to adjust their payments or otherwise change their loans to make them more manageable."
"Loan modifications that avoid foreclosure not only help homeowners, they are usually cost-effective for investors," Bethune continued. "The critical ingredient here is that that the costs to the investors and servicers of the loan modifications in many cases would be less than the cost of foreclosure."
The Bush administration also announced that it is stepping up pressure on Congress to move forward on a bill to expand the role of the Federal Housing Administration, as well as potential changes to legislation and regulatory oversight which currently restricts the activities of Fannie Mae and Freddie Mac.
Bush's plan is based on recommendations from the HOPE NOW Alliance--a coalition of 11 of the largest mortgage service companies, mortgage counseling agencies, investors, and large trade organizations. HOPE NOW has been working closely with Treasury Secretary Henry M. Paulson to come up with a systematic approach to combat the turmoil in the mortgage market.
The White House's plan also meets the approval of the National Association of Home Builders (NAHB). NAHB President Brian Catalde said in a released statement that "the Administration's plan to help struggling borrowers stay in their homes is one of several steps that can help stabilize the housing market and reassure consumers and investors in the mortgage market."
"We applaud this action and urge Congress to follow up quickly on pending legislation that would provide additional help in easing the credit crunch and restoring confidence in the marketplace," Catalde continued.
Scott Syphax, CEO of Nehemiah Corporation of America, the largest and oldest private downpayment assistance provider, also responded positively to the White House foreclosure relief plan.
"We applaud President Bush's foreclosure relief plan as a modest step in the right direction underscoring the importance of stronger underwriting standards, mortgage education and the need for greater controls in order to protect homebuyers," Syphax said.
Fact Sheet: Helping American Families Keep Their Homes (Source: The White House)