Bush takes steps to solve loan crisis
The rate freeze could help some 250,000 borrowers, but experts say that's not enough to shore up the economy.
With foreclosures reaching new heights, a downturn in housing has become a problem for the whole economy, not just for troubled subprime borrowers.Skip to next paragraph
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That's why President Bush announced Thursday a voluntary private-sector plan to freeze interest rates for many borrowers at risk of losing their homes.
The problem: Economists say the freeze is only a partial answer to the challenge.
That doesn't make the move unimportant. But when it comes to fighting a potential recession in the economy, the interest-rate cut expected next week from the Federal Reserve may accomplish more.
"There's no question that [housing] is the big factor causing growth to slow and raising recession risks," says James O'Sullivan, an economist at the investment firm UBS. But to ease the crunch, "the main tool has to be monetary policy." Still, analysts say that it's time for many tools, not just one, to be deployed.
"Desperate times call for desperate measures," says Jared Bernstein, an economist at the Economic Policy Institute, a left-of-center think tank in Washington. "Housing experts have said this downturn is extremely unique and severe."
One sign of that emerged Thursday before Mr. Bush spoke. The Mortgage Bankers Association announced that 0.78 percent of all US mortgages started the foreclosure process during the quarter from July to September, the highest ever reported by the organization. The delinquency rate – the share of loans 30 days or more past due – rose to 5.59 percent, the highest since 1986, it said.
Under the plan announced by Bush, many borrowers who face an upward reset in their interest rate will be allowed to keep their current mortgage payments for a five-year grace period.
Since the initial interest rates are sometimes called "teaser rates," the plan has been dubbed the "teaser freezer."
The affected borrowers would include those with adjustable-rate mortgages (ARM loans) who show that they won't be able to pay once the loan resets, but who can keep paying the current amount. When other limitations are factored in, analysts say the move will affect only a small subset of an estimated 2 million homeowners facing an ARM reset in the next year or so.
"In theory, the plan could help as many as 750,000 subprime homeowners," Mark Zandi, chief economist for Moody's Economy.com, told Reuters. "In practice, my sense is that it will probably help, at best, about 250,000 homeowners."
The plan, brokered in part by US Treasury Secretary Henry Paulson, comes at a time when banks appear to have fallen behind in dealing with the tide of mortgage defaults. The goal is not just to mitigate the foreclosure problem, but to soften its impact on the wider economy.
The danger is a downward spiraling vortex. The more homes go into foreclosure, the more inventory comes onto the housing market at a time when home prices are already falling. That puts more borrowers at risk of being "under water," with homes worth less than the balance on their loans.
This, in turn, spirals into the performance of the economy. Overall consumer spending takes a hit when the key household asset – the home – falls in value, a fact not lost on Bush administration officials.
"They deserve our applause and appreciation for undertaking to solve what's starting to look like a market failure," says Mr. Bernstein. "The industry itself doesn't seem to be capable of organizing to address this in a meaningful way."
Bush's plan to help struggling homeowners
• Rate freeze – Those who can't refinance or afford their loan once it resets higher could have their introductory "teaser" rates frozen for five years
• Fast track – Those who can refinance into more affordable products could be fast-tracked into a better loan
• Screening – To screen out speculators, owners would have to live in their homes to be eligible
Source: AP, The Wall Street Journal