In a bid to stanch the swell of home mortgage foreclosures, the Bush administration said Thursday it will freeze interest rates for up to five years on more than a million subprime mortgage loans.
The deal was hammered out with leading mortgage firms and investors in mortgage-backed securities.
The president, flanked by Treasury Secretary Henry Paulson and Housing and Urban Development (HUD) Secretary Alphonso Jackson, said they were working to limit disruption to the economy.
"There's no perfect solution, but the homeowners deserve our help," he said.
He and Paulson stressed that government funds will not be used to execute the plan.
"Lenders and investors would face enormous losses, so they have an interest in supporting mortgage counseling and working with homeowners to prevent foreclosure," the president said.
As for the government, he said, its function is not to 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," President Bush said, noting some 1.2 million homeowners could be helped.
Not all of those homeowners would get the rate freeze, however.
The five-year freeze is applicable only to borrowers with loans agreed to from January 2005 through July 2007; and those loans must be slated to adjust between January 2008 and July 2010.
Others would get assistance in refinancing with their lenders as well as moving into loans backed by the Federal Housing Administration, according to President Bush.
Adjustable-rate mortgages typically initiate with attractive, low, single-digit interest that can make very expensive homes affordable — at that time — to those of modest income. But it can quickly become untenable when it adjusts, typically upward, to sync with levels in the broader economy.
They are crafty debt instruments for those who are savvy about debt management. They came to wreak havoc on the credit market, however, because they were so freely issued to borrowers who couldn't keep up with the additional amount tacked on when the mortgages adjusted higher.
Consequently, some 2 million people were projected to go into foreclosure next year as payments on their adjustable-rate mortgages ratchet up to unaffordable levels.
Some of the new payments are estimated at as much as 12 percent above what homeowners currently pay.
The president's plan comes amid fresh reports of a stressed housing market. Home foreclosures surged to an all-time high in the third quarter.
The Mortgage Bankers Association said Thursday that the percentage of all mortgages nationwide that started the foreclosure process jumped to a record high of 0.78 percent from July to September. That surpasses the previous high of 0.65 percent set in the previous quarter.
More homeowners also fell behind on their monthly payments. The delinquency rate for all mortgages climbed to 5.59 percent in the third quarter. That was up from 5.12 percent in the second quarter and was the highest since 1986, the association said. Payments are considered delinquent if they are 30 or more days past due.
The five-year moratorium put forth by the Bush administration is middle ground. Banking regulators were seeking up to seven years, while industry leaders were up to freezing rates for no more than two years.
The deal also involves plans to ease the way for borrowers to refinance their mortgages through lenders or state and local housing authorities.
Only those with the income to pay their mortgages at lower rates will be eligible. And the plan would be offered only to people who live in their homes. That way, real estate investors won't benefit from the options.
President Bush and top regulators such as Federal Reserve Chairman Ben Bernanke have previously acknowledged that many consumers were shoved into loans with terms that they did not understand. They have said that the mortgage industry will become more transparent.
On Thursday, President Bush said the Fed will soon announce stronger lending standards aimed at helping borrowers.
"HUD and the federal banking regulators are taking steps to improve disclosure requirements so that homeowners can be confident they are receiving complete, accurate and understandable information about their mortgages," he said.
Consumers weren't the only ones disappointed when adjustable-rate mortgages didn't work. Many lenders and investors across the globe came up short as well because mortgages today are bundled and sold as securities to investment firms instead of remaining in the portfolio of the originating lenders — who, if they had problems, could go back to the banker that loaned the money and renegotiate, if possible. The rash of foreclosures made the securities difficult to offload.
The debacle toppled reputable firms, forcing them to seek emergency funding and unseating their top officers. Some of the biggest players were Citigroup, Merrill Lynch and Countrywide Financial.
With additional reporting by The Associated Press