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| White House: Treasury Secretary Henry Paulson glances over as US President George W. Bush speaks about his plans aimed at
slowing a wave of home loan foreclosures that has threatened to knock the US economy into recession and has rattled investors
worldwide. Kevin Lamarque/Reuters |
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.
By Mark Trumbull | Staff writer of The Christian Science Monitorfrom the December 7, 2007 edition
Page 1 of 3
With foreclosures reaching new heights, a downturn in housing has become a problem for the whole economy, not just for troubled subprime borrowers.
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.
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