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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 3 of 3
The plan focuses on subprime borrowers – often those with weak credit history – who bought since 2005, when home prices were near their peak. As the value of their homes fall, they can't resell and pay off their loans if they have trouble making payments.
On these loans, the initial "teaser" rate was not necessarily very low. It could be 8.5 percent on a 30-year loan where resets begin after the second year.
So freezing rates doesn't leave lenders with nothing.
But it does avoid a "payment shock" for borrowers, which could amount to $350 or more per month, experts say.
A central challenge in the current housing crisis has been that after most subprime loans were made, they were generally packaged into mortgage securities for investors to buy. Now, those investors own the rights to the mortgage payments, which raises legal hurdles when determining whether loan-modification deals are in the investors' best interest.
Paulson said that investors are "on board" with the plan, however. "The risk of litigation should be manageable."
The American Securitization Forum, which represents those who securitize mortgages, was engaged in developing the plan alongside mortgage bankers.
Eric Rosengren, president of the Federal Reserve Bank of Boston, outlined a close link between housing and the wider economy in a speech this week.
"The current problems in the subprime market are heavily dependent on economic conditions," he said. "Our research suggests that the foreclosure crisis will get worse before it gets better, but our forecast is quite dependent on how far house prices fall."
Where the housing market heads will be vital not just for the fate of subprime loans, but for the US economy. Mr. O'Sullivan doesn't predict a recession, but he sees growth falling perilously close to zero before it begins to recover late next year. He forecasts weak economic growth of 1.8 percent next year.
"Home-price decline is one of the factors that could lead to recession," says Michael Cosgrove, publisher of the EconoClast newsletter in Dallas. And with prices falling, "the Fed can ease [interest rates] significantly at this point without inflation being a concern."
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
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