Bush Intervention May Slow Mortgage Plans

President Bush had hardly unveiled his proposal to stem the rising tide of foreclosures before the fighting began.

Industry groups are betting the administration’s plan will blunt congressional interest in pursuing a legislative remedy which mortgage lenders, servicers and investors oppose.

Consumer rights groups, unions and several key Democrats, on the other hand, say there’s more to be done.

Presidential hopeful Sen. Chris Dodd (D-Conn.) likened the president’s plan to “using a squirt gun to put out a fire.”

The powerful Service Employees International Union agreed.

“The Bush administration’s so-called ‘teaser-freezer’ plan falls far short of what is needed to help families who already face the loss of their homes,” and does nothing to uproot the abusive industry practices that caused the current mess, said Stephen Lerner of the SEIU.

Mortgage industry lobbyists having been fighting hard against a proposal introduced in both chambers that would allow bankruptcy court judges to modify the terms of home mortgages.

Supporters of that proposal say it could help as many as 600,000 homeowners escape foreclosure.

Industry players and GOP critics say the change could plunge the market into deeper turmoil, making mortgages more expensive for borrowers across the board.

The White House plan “is going to end up removing a lot of potential support for the bankruptcy reform bill,” predicted Kurt Pfotenhauer, senior vice president of government affairs for the Mortgage Bankers Association of America.

“This is a more effective approach that does not cost every other borrower more in interest rates and closing costs going forward.”

The administration’s move also makes it more likely Congress will pass a stalled modernization of the Federal Housing Administration, said Travis Larson, spokesman for the Securities Industry and Financial Markets Association.

Combined, the measures will help keep many borrowers in their homes “without the wide-ranging negative consequences the bankruptcy bill would inflict on the larger economy.”

The subprime plan unveiled Thursday was the product of weeks of negotiations between the White House and mortgage servicers, lenders and investors.

It establishes a set of industry-wide standards designed to funnel a group of at-risk homeowners into mortgages they can afford.

The plan offers help only to subprime borrowers who can afford the initial “teaser” rate on loans but wouldn’t be able to make their payments once that rate resets.

Mortgage servicers have agreed to use the standards to provide these borrowers one of three solutions, depending on their profiles: refinance the existing mortgage; move them into a mortgage backed by the Federal Housing Administration; or freeze their teaser rate for five years.

The announcement came on the heels of news from the Mortgage Bankers Association that home foreclosures hit an all-time high in the third quarter.

President Bush said the plan could help as many as 1.2 million borrowers.

“The rise in foreclosures would have negative consequences for our economy,” he said in a speech announcing the plan.

“We should not bail out lenders, real estate speculators, or those who made the reckless decision to buy a home they knew they could never afford. Yet there are some responsible homeowners who could avoid foreclosure with some assistance,” Bush said.

The program would be limited to borrowers who live in their homes.

Speaking after Bush, Treasury Secretary Henry Paulson said the current case-by-case loan modification system would be overwhelmed by the 1.8 million owner-occupied mortgage resets coming in the next two years.

“It is in everyone's interest — homeowner, servicer, investor — to develop a market-based approach to avoid foreclosures that are preventable,&rdquo Paulson said.

While industry sees Bush’s plan as a much-preferred alternative to the congressional action, key Democrats and consumer advocates don’t appear ready to stand down.

Critics argue that the administration’s solution is small given the scope of the mortgage problem.

They say it doesn’t do a thing for the homeowners whose subprime mortgages — designed for those with less-than-perfect credit — have already reset and are behind or in foreclosure.

The Center for Responsible Lending estimates Bush’s plan will help only seven percent of subprime borrowers in danger of losing their homes.

Bankruptcy reform is still an urgent goal because it will help those the Bush plan will not, supporters argue.

“The president’s plan will not help homeowners who have already fallen behind in their mortgages and are close to or have entered foreclosure,” said Josh Nassar, the Center’s vice president of federal affairs.

“Bankruptcy change is absolutely necessary.”

“There’s no incentive to get those servicers to come to the table and modify those kinds of loans,” Brenda Muniz, legislative director of the Association of Community Organizations for Reform Now, or ACORN, said of borrowers already in trouble.

Some lobbyists on the consumer side say privately that there’s no question industry is backing Bush’s plan partly out of opposition to the bankruptcy measure.

It’s also questionable whether the mortgage industry will really abide by a voluntary plan with no real accountability, skeptics say, pointing to the industry’s poor track record to date.

Moody’s found that so far that lenders have relaxed terms on just 1 percent of the subprime mortgage loans that reset to higher interest rates since January.

Dodd criticized the plan for failing to include a uniform method for tracking the progress of loan modifications.

“The administration’s proposal ... leaves the door wide open for servicers to continue their foot dragging,” he said.

In addition to the bankruptcy measure, lawmakers in both chambers are working on new mortgage lending rules aimed at curbing lax and abusive practices that many blame for the current wave of foreclosures.

“The industry is not going to police itself,” Sen. Robert Menendez (D-N.J.) who has been working on a bill with Dodd.

In his speech, Bush continued to criticize Congress for failing to move other legislation designed to alleviate housing pain.

The two bills in question — a bill to reform the so-called government-sponsored entities Fannie Mae and Freddie Mac and a FHA modernization measure — have stalled in the Senate.

GOP holds are responsible for delay on the latter, Senate Democrats complain.

Instead of holding press conferences, Dodd asked of Bush, “why don’t you call up the Republican leader [Mitch McConnell (R-Ky.)] and ask him what’s wrong with the FHA bill?”