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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.
from the December 7, 2007 edition
Page 2 of 3
"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."
In addition to announcing the goal of greater forbearance, Bush called for Congress to pass legislation that he supports to bolster the role of government-sponsored enterprises, such as Fannie Mae, in helping homeowners get mortgages and refinancing them.
"The Congress hasn't sent me a single bill" to help homeowners, he said.
For their part, Democrats have called the president's plan too timid. Some, including Sen. Hillary Clinton of New York, would like to see a moratorium on foreclosures.
Bush's approach to the housing crisis also has critics on the right. Many free-market advocates see the rate-freeze plan as counterproductive meddling by government. Secretary Paulson, in comments to the press, emphasized that the plan is voluntary.
"This is a private sector effort," he said.
The move toward a system for modifying loans en masse when possible, rather than foreclosing, could help banks and investors who hold mortgages, because they stand to lose if home prices continue falling. Each foreclosure can cost banks $50,000, and sometimes more, when they resell the home in a distressed market.
By some forecasts more than 1 million homes could enter foreclosure next year, even with the new rescue plan.
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