Bush Plan Would Freeze Subprime Rates

President Bush, left, accompanied by Treasury Secretary Henry Paulson, right, makes a statement about subprime mortgages, Thursday, Dec. 6, 2007, in the Roosevelt Room of the White House in Washington. (AP Photo/Charles Dharapak)[
AP Photo/Charles Dharapak
President Bush announced on Thursday a plan to freeze interest rates for hundreds of thousands of strapped American homeowners whose mortgages are scheduled to rise in the coming months.

"The steps I outlined today are a sensible response to a serious challenge," Bush said.

The help is aimed at homeowners with subprime adjustable mortgages with those low "teaser" interest rates, reports CBS News chief White House correspondent Jim Axelrod. They would be frozen for five years.

The White House says the freeze and other refinancing programs would help more than a million homeowners stave off foreclosure.

Seeking to counter criticism he is violating his free-market principles, Bush said the private-sector plan does not represent the imposition of a government solution to the mortgage crisis.

"We should not bail out lenders, real estate speculators or those who made the reckless decision to buy a home they knew they could not afford," he said.

The proposal was developed in negotiations led by Treasury Secretary Henry Paulson with the mortgage industry. It would freeze introductory "teaser" rates on subprime mortgages, preventing them from resetting to higher rates for five years.

CBS News correspondent Anthony Mason said the plan targets only those borrowers who can afford their introductory rates and are up-to-date on their payments, but are at risk of default when rates reset and payments rise sharply.

Mr. Bush said the plan was developed in negotiations with the mortgage industry led by Treasury Secretary Henry Paulson. But only a small fraction of that number will be subject to the rate freeze.

It's estimated that some 600,000 others with subprime mortgages would not be eligible, including those already in foreclosure.

CBS News White House correspondent Mark Knoller says that in addition to a rate freeze, the plan offers other options for borrowers, including refinancing of troubled loans into new private mortgages, or moving them into the FHA Secure loan program.

Release of the plan came after news earlier Thursday that home foreclosures surged to an all-time high in the July-September period. The Mortgage Bankers Association reported that the percentage of all mortgages that started the foreclosure process in the third quarter jumped to a record 0.78 percent, surpassing the previous record of 0.65 percent of all mortgages in the second quarter.

Homeowners who may be eligible are requested to call 1-888-995-HOPE, a counseling hotline to get information on the FHA Secure mortgages.
At his appearance at the White House today, President Bush said, while the economy has proved to be highly resilient, the rise in foreclosures gone unchecked would have negative consequences for the economy, including enormous losses for lenders and investors, and the prospect of millions of homeowners with adjustable rate mortgages losing their homes.

"The holidays are fast approaching and unfortunately it will be a time of anxiety for Americans worrying about their mortgages and their homes," he said.

During his appearance, Mr. Bush chastised Congress several times for not passing legislation to reform lending practices. "In the past three months Congress has not sent a single bill to help homeowners," he said.

Among the issues he said were facing delay in the Senate were bills to modernize the FHA, change the tax code to benefit homeowners who lose equity, and reform Freddie Mac and Frannie Mae.

The administration's effort is aimed at stemming a further tidal wave of foreclosures in coming years as 2 million subprime mortgages - loans provided to borrowers with spotty credit histories - reset from their introductory rates of around 7 percent to 8 percent to levels as high as 11 percent, adding hundreds of dollars to the typical monthly payment.

The mortgage companies will offer to freeze the loans at the lower introductory rates as long as the borrowers did not miss any payments at the lower rate.

The program is the biggest effort yet to deal with the surge in mortgage defaults, which have piled up billions of dollars in losses for big banks, hedge funds and other investors while roiling financial markets worldwide. The defaults are the latest economic blow from the worst housing slump in more than two decades. Some economists think the housing bust may become severe enough to push the U.S. into recession.

Mike McHugh, chief executive of Continental Home Loans, told CBS News that if investors are the ones who ultimately absorb the cost, it may discourage them from underwriting mortgages, thus making it harder for everyone to get loans.

"This will have a repercussion and will be felt for years to come," he said.

Administration claims that this was not a bailout, were rebuffed by some. John Taylor, President & CEO of the National Community Reinvestment Coalition, said, "The administration's aggressive focus on this problem should dispel once and for all the notion that the borrower is to blame. This is not a homeowner bailout, this is a bailout for failed regulatory oversight.

"Infectious greed and malfeasance by lending institutions is the overwhelming culprit, not consumer misbehavior," he said.

Two Democratic presidential contenders, Hillary Rodham Clinton and John Edwards, complained Wednesday that, given the risks to the economy, Bush's proposal did not go far enough. They proposed their own plans that would not only freeze mortgage payment rates but also declare moratoriums on further foreclosures to pressure lenders to reach at-risk homeowners.

The financial services industry applauded the administration for negotiating a plan that will allow free-market forces to operate. The hope is that the five-year freeze will buy time for the housing industry to work down record levels of unsold homes and for sales and prices to start rising again.

A housing rebound would enable homeowners to refinance their current adjustable rate mortgages into fixed-rate loans with more affordable monthly payments.

The big sticking point in the lengthy negotiations was getting investors who have purchased the mortgages after they were bundled into mortgage-backed securities to agree to accept lower interest payments. Critics have said even with a deal, there are likely to be lawsuits.

"The (big) question remains: 'Will investors who might balk at going along with this be able to maintain legal roadblocks and prevent the plan from going into effect?'" asked Sen. Charles Schumer, a New York Democrat.

But officials representing major players in the mortgage industry said they believed the plan would withstand any legal challenges and would help at-risk homeowners avoid defaulting on their mortgages.

Steve Bartlett, president of the Financial Services Round-table, a trade group representing the country's largest financial service firms, said the deal would benefit banks, investors and homeowners since there is a significant cost when a mortgage is foreclosed.

Under the administration plan, the rate freeze will apply to loans made at the start of 2005 through July 30 of this year and will cover loans that had been scheduled to rise to higher rates between Jan. 1, 2008, and July 31, 2010.

The plan represents an about-face for Paulson, who until recently had insisted the mortgage crisis could be handled on a case-by-case basis. However, he and other administration officials became convinced the tide of foreclosures threatened by the mortgage resets represented such a severe threat that a more sweeping approach was needed.

"It will make a difference," Paulson said of the plan. "It will reduce the number of avoidable foreclosures," which he said were no benefit to no one.

"This is not a silver bullet. We can't put together an industry-wide initiative and suddenly make the excesses and bad lending practices of the past several years go away."

Mr. Bush said he had a message for every home owner: "The best you can for your family is to call 1-800-995-HOPE," a counseling hotline to get information on the FHA Secure mortgages.

Shortly afterwards, the White House Press Office announced that the phone number Mr. Bush read was wrong. The real number is 1-888-995-HOPE.