U.S. organizing an adjustable-rate freeze
The plan would provide meaningful aid to as many as 1 million homeowners facing foreclosure.
By Mark Trumbull | Staff writer of The Christian Science Monitorfrom the December 4, 2007 edition
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Help is coming to address one of the most important factors hammering the US housing market: the large number of homeowners at risk of foreclosure because their interest rates will soon reset upward.
The emerging plan – a voluntary effort to temporarily freeze mortgage interest rates for some – won't be a one-step fix for the nation's mortgage troubles, said Treasury Secretary Henry Paulson, who is coordinating the private-sector plan. But it would provide meaningful aid to as many as 1 million homeowners facing foreclosure.
It could also help the economy escape a possible recession next year. A rising tide of foreclosures has become a key force behind the unusual severity of the current housing downturn.
"There's no silver bullet," says Brian Bethune, an economist at Global Insight, a forecasting firm in Lexington, Mass. But reset relief "is going to help." In much of the nation, home prices have been declining over the past year after a historic run-up. The good news is that the decline is helping to make housing more affordable for buyers who had been priced out of the market. Over time, that should help restore a balance of supply and demand.
But right now, the economy faces some risks if home prices fall too far. The further prices fall, the greater the number of recent home buyers who will go "upside down," having homes that are worth less than the balance of their mortgage loans.
The result could be even more foreclosures – and more homes up for auction in an already glutted market.
Banks, already smarting from large losses tied to mortgage loans, could further restrict credit to new home buyers out of uncertainty about property values.
"The mortgage markets can't withstand that kind of pressure," Mr. Bethune says.
Lenders have already been tightening credit standards in response to a shifting economic climate. They felt they could lend on easy terms when prices were rising, but with prices falling they have less appetite for risky loans.
Against this backdrop – rising borrower defaults and tighter bank credit – the Bush administration is under growing pressure to contain the economic fallout.
At a housing-related conference Monday, Secretary Paulson discussed the emerging plan to help at-risk borrowers.
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