| December 10, 2007 | by Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, and Ali Frick Contact Us | Tell-a-Friend | Archives | Permalink |
'Too Little, Too Late' Subprime Solution
On Thursday, President Bush stood with Secretary of the Treasury Henry Paulson and Secretary of Housing and Urban Development Alphonso Jackson to announce an agreement with the mortgage industry to provide relief to families facing home foreclosures. "The holidays are fast approaching and, unfortunately, this will be a time of anxiety for Americans worried about their mortgages and their homes. There's no perfect solution, but the homeowners deserve our help," Bush said. His plan would freeze mortgage rates for some troubled borrowers. Yet the vast majority of Americans facing foreclosure would be left out by the Bush plan, including the record 351,000 people who fell into foreclosure in the third quarter of this year. The deal asks for only a voluntary freeze on interest rates, and does not require congressional approval or funds. The effects of the subprime mortgage crisis have spread throughout other sectors of the economy, an estimated 800,000 Americans have are already faced foreclosure since mid-2007, and 3.5 million loans are expected to default before the end of 2010. Although Bush's plan will offer substantial help to thousands of families, it is, as The New York Times editorial board described it, "too little, too late and too voluntary." Andrew Jakabovics of the Center for American Progress said, "As with other serious crises that have happened on Bush's watch, the solution is to make it the next administration's problem."
SMALL HELP FOR THOUSANDS: After months of ignoring the mortgage crisis, Bush's acknowledgment of the problem is certainly a step in the right direction. For those who qualify -- an estimated 250,000 borrowers -- Bush's plan would give them a five-year freeze on their adjustable loan rates. "Bush will also ask Congress to temporarily expand the authority of states and localities to issue tax-exempt mortgage-revenue bonds to help people refinance their mortgages." Further, those borrowers who do not qualify for a rate freeze can still receive help from mortgage counselors, who can walk them through the process of refinancing and help them stay on top of their payments. Secretary Paulson described the HOPE NOW program as "a coalition of mortgage servicers, counselors and investors that are working to avoid preventable foreclosures and to improve the functioning of the mortgage markets." Paulson said that 50 percent of foreclosures occur "without borrowers ever talking with a mortgage counselor." The HOPE NOW program, which will use a national letter campaign as well as other publicity efforts to reach homeowners, will thus provide needed assistance and advice to millions of Americans unsure of how to cope with rising interest rates. Additionally, some homeowners may be able to refinance into private, fixed-rate mortgages, or use Federal Housing Administration loans.
TOO MANY EXCLUDED: Bush's plan is hardly the comprehensive assistance millions of Americans need. Sen. Chris Dodd (D-CT), chairman of the Senate Banking Committee, called the plan "little more than financial wallpaper" that was "insufficient to say the least." The plan "would exclude those who are delinquent on their payments -- about 22 percent of all subprime borrowers, according to First American LoanPerformance, an industry research firm." Moreover, Bush's plan would apply only to those facing rising rates in 2008 and 2009, although "$57 billion in subprime loans were scheduled to be reset at higher rates in the final three months of this year." Also, "in one curious twist, the plan could eliminate many people who have good credit scores or who managed to improve their credit scores, because the good ratings would be a sign they did not need help." Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, said, "We've all told people, don't go any more deeply into debt. Now we're saying that people who go more deeply into debt will have an advantage over people who don't go more deeply into debt." Finally, some economists worry that the plan may discourage purchasers of mortgages bundled by banks. Standard & Poor warned, "Declining investor participation means reduced capital and liquidity, which may affect homeownership and borrowing opportunities." Barclays Capital -- extrapolating from a similar program recently unveiled in California -- estimates that only about 12 percent of all subprime borrowers, or 240,000 homeowners, would get relief.
POSSIBILITIES FOR REAL RELIEF: Though some conservatives have derided Bush's already paltry plan as a "taxpayer-financed bailout," it is clear that the government needs to take more dramatic action to help American families stay in their homes and forestall larger shockwaves across the larger economy. Among other measures, "we need a Family Foreclosure Rescue Corporation (FFRC), which would issue new, fixed-rate mortgages to those borrowers 'under water' and facing default or foreclosure. In the process, the FFRC would buy up the old adjustable-rate mortgages from lenders and investors and replacing them with new, tax-friendly government-rated bonds equal to the current value of these homes," Jakabovics said. Rep. Joe Baca (D-CA) has proposed legislation to take this necessary step. Last month, the House passed the Mortgage Reform and Anti-Predatory Lending Act, which requires lenders to ensure a borrower's ability to pay, prohibits unfair lending practices like steering, and creates the Office of Housing Counseling, among other provisions. The Senate has yet to take up the bill. The Center for American Progress has also called for an increase in federal funds to target key cities and states facing the highest risk of mass foreclosure and a strengthening of programs that aid families while their mortgage contracts are renegotiated. "Any plan from the Administration that falls short of this goal of providing long-term affordability will merely defer mass foreclosures to a later date," Dodd said.
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