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Bush's Subprime Rescue Plan Coincides With Sobering Delinquency Report

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Several hours before President Bush announced the details of his administrations plans to assist homeowners who are facing foreclosure the Mortgage Bankers Association released its delinquency survey for the third quarter.

The survey showed that the number of loans in the foreclosure process and the number of loans entering that process were at the highest levels since MBA began keeping records 21 years ago.

Loans entering foreclosure - generally those that are 90 days in arrears on payments - represented a seasonally adjusted 0.78 percent of all loans on one-to-four family residences. In the second quarter the rate was 0.65 percent and one year ago it was 0.46 percent.

Loans that are in foreclosure represented 1.69 percent of all loans, an increase of .29 percent since the second quarter and .64 percent since the third quarter of 2006.

As expected, adjustable rate loans (ARMs), especially those classified as subprime, are performing much worse than their fixed-rate and/or conventional counterparts with subprime ARMs making up 43 percent of loans entering the foreclosure process even though they represent only 6.8 percent of the universe of 1-4 family loans. Prime ARMs, those given to credit-worthy borrowers with documented income accounted for 18.7 percent of new foreclosures (they represent 14.5 percent of outstanding loans).

5.59 percent of all borrowers were delinquent on their mortgage loans during the third quarter compared to 5.12 percent in the second quarter and 4.67 percent one year ago. Delinquency is often temporary when homeowners have a one or two month financial crisis or a mortgage check goes missing in the mail. Many 30-or-60-day delinquencies are resolved before the loans enter any type of legal process. Still this was the highest delinquency rate since 1986.

While conventional fixed-rate mortgages continue to perform well in the main, some borrowers are feeling the pinch when they are unable to sell their homes due to the depressed market.

Trend-setting California scored again, although in this case it is not a compliment. The number of subprime ARM foreclosure starts in the state in the third quarter equaled the aggregate of those in 35 other states.

At 1:30 Thursday Bush and Treasury Secretary Henry Paulson held a press conference to announce the details of the foreclosure reduction plan. Bush essentially confirmed the rough outline that Paulson had revealed in a speech before the Office of Thrift Supervision National Housing Forum on Monday. The plan, which was warmly received by many industry leaders attending the conference such as Fannie Mae President Daniel Mudd calls for a five year freeze of mortgage rate increases on so-called teaser rate loans. These are mortgage loans where the introductory rate is artificially low to allow many otherwise unqualified borrowers - unqualified because of their debt to income ratio or unverifiable income - could obtain loans. These teaser rates are set to adjust to market rates after one or two years and often will result in monthly mortgage payments as much as 30 percent higher than the borrowers' initial obligation.

According to many news reports this morning, many lenders and servicers have signed on to participate in the program.

The administration's plans will actually help only a small portion of troubled borrowers. Those who are already delinquent on their loans - whether at the teaser rate or after a reset - are out of luck as are those who are able to pay the loans after rates adjust. This leaves homeowners who are paying as agreed but are facing a reset they won't be able to handle. The number of potential beneficiaries is generally predicted to be about one million homeowners.

At the press conference Bush spent much of his time criticizing Congress for failing to pass a number of mortgage-related initiatives such as his proposal to reform the Federal Housing Administration and bills to reform the tax code to remove short-sale penalties and to encourage programs on the state and local levels to assist borrowers other than first-time homeowners and those buying in distressed areas as allowed by the current code.

Speaking in advance of the Presidents press conference, two Democratic presidential candidates urged more comprehensive efforts. Senator Hillary Clinton, speaking Wednesday at NASDAQ headquarters in New York City accused Wall Street of enabling and encouraging the risky loans that now pose a risk to the economy. She also placed part of the blame on real estate speculators who fueled the rapid increase in housing prices and Wall Street Analysts who gave high ratings to securities backed by subprime mortgages. The Senator had outlined a plan in August to address lending issues and has recently called for a 90-day moratorium in foreclosures as well as a five year freeze on rate changes. Former Senator John Edwards on Wednesday urged a seven-year freeze on interest rate increases.

Clinton also made it clear that lenders should participate in her rescue plan voluntarily or she would consider legislation which would protect mortgage servicers from action by investors when they participate in rate freezes.

There are a lot of problems with the administration's proposals but it is a start and helping one million families is a worthy goal. We will take a closer look at some of the benefits and some of the problems tomorrow.

Dec. 06, 2007. 01:49 PM EST
Treasury Secretary Henry Paulson and HUD Secretary Alphonso Jackson.

Dec. 05, 2007. 3:11 PM EST
Presidential hopeful Hillary Clinton discusses her plan to save subprime borrowers.

NEW! Treasury and Housing Secretaries Make Statement on Subprime Plan
NEW! Paulson-Bush Plan Update

Reader Comments (More)
The foreclosure phenomenon that we are experiencing today is a direct result of the subprime lending practices. Consumers and spec...
This is the fault of the brokers and banks. How many times have you heard radio ads and internet banner ads offering unrealistic r...
I took a wholesale operations manager position for a major subprime mortgage company in 2005. The programs were getting so aggress...

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Housing and Urban Development Secretary Alphonso Jackson, right, accompanied by Treasury Secretary Henry Paulson, speaks at a news conference on mortgages, Thursday, Dec. 6, 2007, at the Treasury Department in Washington. (AP Photo/Kevin Wolf)

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No Quick Fix for Subprime Mortgages

WASHINGTON (AP) — Be ready to wait if you want to get information from a toll-free hot line about freezing the interest rate on your subprime mortgage.

Minutes after President Bush outlined a plan to help strapped homeowners, callers were told to have patience until a counselor could answer their questions and "devote as much time to you as necessary."

But, once they do get through, homeowners may not find the answers they sought.

One caller to the hot line (1-888-995-HOPE) was told there would be "lots of hoops to jump through" to obtain the five-year freeze. The rate hold goes to the heart of the relief effort for people with subprime mortgages, which are loans offered to borrowers with tarnished credit or low incomes.

Even President Bush acknowledged the plan is "no perfect solution." Treasury Secretary Henry Paulson said it was not a "silver bullet."

Only a fraction of the homeowners who face huge jumps in their mortgage payments appear likely to be helped by the plan, negotiated by the Bush administration, to freeze the low introductory rates on their subprime loans for five years. After that, they could be in the same position again.

Homeowners dialing up their mortgage company to get their current rate frozen could be disappointed. The White House plan does not force mortgage companies to give eligible homeowners a break. It is voluntary.

The White House on Friday defended the system and its eligibility requirements.

"I wouldn't call them `hoops,'" White House deputy press secretary Tony Fratto said. "I think we are trying to make sure, as we outlined yesterday, that we're getting at the right population that can best be served by this program."

Bush promoted the initiative Friday for the second day in a row, using his weekly radio address to call it "an example of the government bringing together members of the private sector to voluntarily address a national challenge — without taxpayer subsidies or government mandates." The president taped his address for Saturday airing, and the White House released the transcript on Friday.

In first announcing the initiative on Thursday, Bush said 1.2 million people could be eligible for relief. Aid includes the rate freeze and helping people refinance into more affordable mortgages. The Center for Responsible Lending, a group that promotes homeownership and works to curb predatory lending, estimates that just 145,000 families will qualify for the rate freeze. The criteria are too strict, it says.

The White House plan is aimed at stemming foreclosures, which have shot up to record highs as the housing market has gone from boom to bust.

Subprime borrowers have been hardest hit by the meltdown. Initially low interest rates that reset to much higher rates have clobbered those borrowers. Nearly 2 million adjustable-rate subprime mortgages will reset from introductory rates of around 7 percent to 8 percent to much higher rates this year and next. That raises the specter of even more people being forced out of their homes because they cannot keep up with their monthly payments.

Rising home foreclosures are a headache for politicians and a danger for the economy.

Bush tried to shift blame for the crisis to the Democratic-led Congress.

"The Congress has not sent me a single bill to help homeowners," Bush said.

One measure would give the Federal Housing Administration more flexibility; a second would change the tax laws temporarily to help people who have a portion of their mortgage forgiven by banks.

Sen. Charles Schumer, D-N.Y., complained the criteria for Bush's mortgage freeze are too narrow to help most distressed homeowners and worried that legal challenges by investors might stall the effort.

"While we certainly all hope this will be a shot in the arm for the housing slump, it is hardly a panacea," Schumer said. "There are too many families who may be left out, too much left up to the voluntary willingness of the private sector and too little disclosure and transparency to ensure families who do qualify are being helped."

Under the plan outlined Thursday, the rate freeze offer would be available only to people who have not missed any mortgage payments at their introductory interest rate. It also would apply only to loans taken out between 2005 and this past July 31 and scheduled to rise to higher rates in Jan. 1, 2008, and July 31, 2010. To make sure speculators don't get the break, the rate freeze offer applies only to people living in their homes.

The idea behind the administration-negotiated plan is that the five-year freeze will buy time for the housing sales and prices to start rising again. Such a rebound would enable homeowners to refinance their current adjustable rate mortgages into fixed-rate loans with more affordable monthly payments. But some people who want to buy homes and have been priced out of the market are upset that there's no help in sight for them.

Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association in the third quarter, a record, 18.81 percent of them were past due. A record, 4.72 percent of the loans entered into the foreclosure process during that period.

Meanwhile, there still is the possibility that investors, who were counting on bigger returns from the higher rate resets, will balk at extending the duration of the lower rate.

George Miller, executive director of the American Securitization Forum, whose members include investors, ratings agencies and other financial players, backed the White House's effort and developed streamlined procedures for lenders to follow when sorting through borrowers' requests for relief. He was hopeful lawsuits could be avoided, but he struck a note of caution.

"Certainly, there is no complete insulation from legal exposure," Miller said.

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