Bush Unveils Foreclosure Relief Plan

President Bush addresses the nation's housing downturn as the White House puts together a plan with lenders to help homeowners facing sharply higher mortgage interest rates.

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It's been in the works for months, and today, President Bush unveiled the plan to help struggling homeowners - by freezing the interest rates on their loans. Many people are seeing the rates on their adjustable loans go through the roof. Economists widely estimate that between 500,000 and 1 million homes will get foreclosed on in 2008 alone. Already, foreclosure rates are at their highest in 50 years.

NPR's Chris Arnold begins our coverage.

CHRIS ARNOLD: The president says he wants to help people who could afford their initial interest rate, that is a homeowner who's been making their payments at, say, 7 percent for the past year but can't afford the 10 percent that the loan is about to adjust to. The administration has brokered a deal where the president said the industry will voluntarily help borrowers in one of several ways, including…

President GEORGE W. BUSH: By freezing their current interest rates for five years.

ARNOLD: Arm-twisting this kind of a deal is a bit of change for an administration that usually takes a more free market approach, but the president stressed that this is not a bail out.

Pres. BUSH: 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.

ARNOLD: There are limits: the plan only covers people who got a loan between certain dates, and the rate freezes only for people whose rates have not adjusted yet and who are current on their payments. But the administration says this plan, combined with its other initiatives, could help more than a million homeowners avoid foreclosure over the next couple of years.

Some housing advocates, though, are skeptical.

Mr. MIKE CALHOUN (President, Center for Responsible Lending): We support this effort, but don't expect it to reach many families.

ARNOLD: Mike Calhoun is the president of the Center for Responsible Lending. He says the industry has made similar pledges before.

Mr. CALHOUN: This is the third time this year where there's been an announced campaign by industry to modify mortgages.

ARNOLD: But Calhoun says most companies haven't followed through. And his latest plan, too, is voluntary. The government is still asking, not telling, the industry to freeze rates.

Mark Zandi is chief economist with Moodyseconomy.com.

Mr. MARK ZANDI (Chief Economist, Moodyseconomy.com): I think there needs to be some kind of stick, some legislation that makes it much more costly for services and investors not to follow through.

ARNOLD: One idea is to offer protection from lawsuits to the companies that freeze rates or cut other deals with borrowers. Those mortgage companies are worried that they'll get sued by some investors who lose money because of a rate freeze.

Mr. ZANDI: So I think Congress and the administration are going to have to pass some laws to really make this work. I hope they can get those laws in place quickly.

ARNOLD: There is a growing backlash, though, against this rate freeze plan.

Dick Armey is the former Republican House Majority leader. He doesn't like this at all. First, he says, you're rewarding people for being careless and not reading the documents that they signed. And he says the government shouldn't get into the middle of it. It's better to let the market sort it out.

Mr. DICK ARMEY (Former Republican Representative, North Dakota): My point is you might expect this kind of irresponsible short-sighted gibberish from a campaign because campaigns are essentially brain-dead anyway. But you shouldn't have this kind of irresponsible policy, actual policy initiative by people in public office, like the people at the White House.

ARNOLD: But if the market sorts it out by foreclosing on millions of people in a short period of time, that could push the economy into a recession.

Nariman Behravesh is chief economist with the forecasting firm Global Insight.

Mr. NARIMAN BEHRAVESH (Chief Economist, Global Insight): The bigger the number of foreclosures, the bigger the mess, in a sense, the bigger the ride offs are going to be, and the bigger the losses for the banks and other financial institutions, that's the bigger worry. That - you know, if this thing kind of spreads even more, becomes even bigger, then it could begin to seriously hurt the economy.

ARNOLD: This week, Senator Hillary Clinton called for much the same kind of rate freeze as the president. Behravesh thinks the growing pressure from Washington and the self-interest in avoiding an even bigger financial mess means that the industry is going to start cutting more deals with borrowers and keeping more people in their homes.

Chris Arnold, NPR News.

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What the Mortgage Deal Does and Doesn't Do

A sign advertises that a home for sale is in foreclosure.

hide captionA "for sale" sign advertises that this townhouse in Virginia is in foreclosure.

Paul J. Richards/AFP/Getty Images

President Bush announced a deal with the mortgage industry Thursday to freeze interest rates for up to five years for borrowers with subprime mortgages. The plan was brokered by the Bush administration, working with groups representing lenders, investors and consumers. Here, a look at how the program works, what it does, and just as important, what it doesn't do.

What does the agreement to help troubled home borrowers do?

It would make it easier for lenders to "freeze" certain mortgage rates that are scheduled to reset between Jan. 1, 2008, and July 31, 2010. The "freeze" will last for five years. The idea is that if borrowers are given a little breathing room, the number of foreclosures can be held down.

Will this "freeze" cover everyone who took out one of these adjustable-rate mortgages?

No. The freeze would apply only to loans taken out between Jan. 1, 2005, and July 30, 2007. It doesn't apply to real estate investors and speculators, or to people whose mortgages have already reset to higher rates.

Instead, it is aimed at a narrow category of borrowers: those who have so far been able to pay their mortgages but face an impending reset that may put them into default. People who fell behind in their mortgages even before their reset are excluded, as are people deemed by their lenders to be able to afford a reset.

That sounds as though borrowers who got in over their heads are rewarded, and more responsible borrowers get punished.

You could look at it that way, and many people do. But the country has already seen a sharp jump in foreclosures, which has hurt economic growth. And with some 1.5 million outstanding mortgages expected to reset next year, many more borrowers are expected to have trouble paying their bills.

Some help will be offered to other borrowers as well. The Bush administration points out that it has proposed new rules that will make it easier for some borrowers to refinance their mortgages, for example, by transferring into loans backed by the Federal Housing Administration, and those changes will apply even to borrowers who've paid their bills on time.

Where can people who are concerned about their mortgages get help?

Well, only people who ask for help will get it. They should call 1-888-995-HOPE (4673) — the number for the Homeownership Preservation Foundation, a nonprofit group that offers free housing advice for homeowners.

How far will this plan really go to reduce the number of foreclosures and clean up the mortgage mess?

The biggest criticism of the plan is that it doesn't go far enough. The Bush administration says 1.2 million people could be eligible for a rate freeze, but Barclays Capital has estimated that only a fraction of those—about 240,000 homeowners—would actually get relief. More will be eligible for refinancing assistance.

Most of the loans that will reset in the next two years were long ago bundled into securities and sold to investors. The value of these securities has already fallen. A freeze in interest rates would reduce the value of these investments even more. So some investors will consider going to court in order to stop the plan to freeze rates. Other investors have decided that fighting the freeze will only lead to more foreclosures — and an increased chance of recession. And that, they have concluded, isn't good for anyone.

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