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“Rate freeze called too little, too much”
Critics say it delays inevitable; others oppose intervention
With reports of foreclosures at a 21-year high and the U.S. housing market apparently in its worst shape since 1945, the Bush administration pitched its plan Thursday to ease the subprime loan crisis that was immediately lambasted as too much and not enough.
Admitting that the proposal was not "a silver bullet," Treasury Secretary Henry Paulson announced that the administration had brokered a deal with mortgage industry representatives to freeze interest rates for five years on adjustable-rate mortgages for some subprime borrowers who have damaged credit. The proposal would apply to some 1.2 million homeowners whose mortgages will reset higher in the next two years.
Some representatives of the housing industry praised the plan. "It's not a panacea but it's a step in the right direction," said Jerry Howard, chief executive of the National Association of Home Builders in Washington. "From our perspective, keeping 1.2 million homes off the inventory list [of homes for sale] is a major accomplishment." However, critics bashed the move as government meddling in the free market.
A group of 61 economists sent a letter to Congress on Thursday arguing that the freeze represents federal intervention.
"This letter should give policymakers pause in their rush to pass bailout schemes for the real estate market," said former Sen. Dick Armey, who now chairs FreedomWorks, a Washington grass-roots organization that put together the letter and pushes for less government involvement in private life.
On the flipside, Richard Bira, a Chicago mortgage broker, said he was troubled that the plan didn't go far enough, skipping borrowers who are already in trouble. He added that freezing rates only postpones trouble.
"There is a reason why people are in subprime mortgages," he said. "Their credit is banged up and their track record hasn't been good. Putting a freeze isn't getting to the root of the problem, which is that these people need to work on their credit."
He and others said the plan would barely dent the foreclosure problem.
"I applaud that there is a higher-level view of the gravity of this problem and how broad it really is," said Michelle Collins, senior vice president at ShoreBank in Chicago. "Our communities are suffering and something needs to be done, but at best this feels like a Band-Aid. It delays the inevitable.
"I don't see that there are any teeth here. There are a lot of exclusions in terms of who is not going to get help."
The voluntary agreement would benefit a narrowly defined group of borrowers: Homeowners who got subprime, adjustable-rate loans between Jan. 1, 2005, and July 31, 2007, that are scheduled to reset between Jan. 1, 2008, and July 31, 2010. The borrowers must not have fallen behind on their payments and must be judged to be unlikely to be able to handle the higher monthly bill.
That leaves out Nettie McGee, a South Side homeowner who testified this week before a Senate Judiciary Committee hearing in Washington on the foreclosure crisis.
McGee, 73, refinanced her mortgage two years ago, erroneously presuming that her new loan would have a fixed rate. Instead, a few months ago, she learned that her rate would jump 3 percentage points, pushing her monthly payment up about $200 as of Dec. 1.
The cost of the loan now exceeds her monthly Social Security and pension income, she said.
She said she wished the federal government would enact a freeze that could help her.
"I just need help to get over this hump," she said. "The hump is not big, but it's too big for me right now. I lose a lot of restless nights thinking about how I am going to make it."
A report Thursday from the Mortgage Bankers Association said that about 5.6 percent of all outstanding home loans were delinquent in the third quarter, the highest level since 1986, and shows the scope of the problem confronting borrowers like McGee.
The trade group also said the rate of foreclosure starts and percent of loans in the process of foreclosure are at their highest levels.
In addition, Moody's Economy.com on Thursday released a study that described the housing market as being "in the worst downturn since 1945," with no measurable improvement foreseen until 2010.
Keith Gumbinger, an analyst for HSH Associates, a mortgage-industry publisher in Pompton Plains, N.J., said he expected it would take years to conclude whether the rate freeze would be beneficial, though some unified action seems necessary.
"Till now, nothing has been getting done," he said. "This industry was built for one direction, built to push loans downstream [to investors who would buy them as bundled securities -- another requirement for the frozen rates]. Some percentage of loans were expected to fail, but no one expected the size of the problem and nobody expected this machine to be run in reverse."
Paulson, who spearheaded the cooperative effort, said the approach was necessary to streamline the increased volume of delinquent loans expected in the next few years.
"We all know that it is in everyone's interest -- homeowner, [loan] servicer, investor -- to develop a market-based approach to avoid foreclosures that are preventable," said Paulson. "The current system for working out those problem loans would not be sufficient to handle the anticipated 1.8 million owner-occupied subprime mortgage resets that will occur in 2008 and 2009," he said.