Responding to the growing wave of mortgage foreclosures, President Bush announced measures Friday that could help some troubled borrowers keep their homes. Democrats have criticized the president as being slow to act.
Economists estimate that up to 2 million people around the country could lose their home in the ongoing turmoil surrounding so-called subprime mortgages.
Adjustable Loans Go Through the Roof
The president started his Rose Garden speech on a glass-half-full note, saying that changes in the mortgage industry in recent years created a record level of homeownership.
But President Bush then noted that there also have been "some excesses in the lending industry." He said one of the most troubling developments has been the increase in adjustable-rate mortgages, which start with a low interest rate and adjust higher after a few years.
Many of these exotic adjustable loans are rising — to 11 percent or higher — and are adding hundreds of dollars to borrowers' monthly payments.
President Bush said that the growth in adjustable-rate mortgages has led some homeowners to take out loans that are larger than they can afford. Some borrowers may have been overly optimistic about home prices, while others may have been confused by the terms of their loans or misled by irresponsible lenders.
The president said he does not want to "bail out" homebuyers or lenders who were reckless. But he said he wants to help responsible homeowners who got stuck.
One measure that goes into effect right away uses the Federal Housing Administration to help people refinance into loans with better terms.
Most lenders won't offer new loans to borrowers who have fallen behind in payments after their loans adjusted higher. But if the FHA insures a new loan, the borrower can refinance.
Another measure that needs congressional approval would waive a tax that homeowners pay if a lender forgives part of their loan.
Proposals Help Only Small Fraction of Those in Trouble
The FHA estimates that the Bush proposal would help an additional 80,000 homeowners to refinance.
Mike Calhoun, president of the nonprofit, nonpartisan Center for Responsible Lending, says that number might sound like a lot, but it underestimates the full extent of the problem.
"Even the Bush administration acknowledges that several million homeowners face large payment shocks and the threat of foreclosure in the upcoming year," he says.
Calhoun says the administration's response would need to increase by at least ten- or twentyfold in order to address the full problem.
The Holy Grail: Loan Modifications
Calhoun says the real hope for the bulk of the homeowners in trouble is for the lenders and servicing companies to renegotiate the loans to make them affordable.
President Bush strongly urged lenders to work with homeowners.
"I believe lenders have a responsibility to help these good people to renegotiate so they can stay in their homes," Bush said.
But housing advocates say such statements alone don"t have a lot of teeth. And they say the president and others in Washington need to do more than just ask lenders to work with homeowners.
Bruce Marks heads up the Neighborhood Assistance Corporation of America. The group is working with borrowers who Marks says are stuck in unfair loans.
He says his group has submitted more than a thousand requests for loan modifications to major lenders and loan servicers, asking them to restructure the loans to make them more affordable.
"They're not doing it," Marks says. "Right now, the lenders are only giving lip service. The regulators are giving lip service, and the president and Congress are letting them off the hook."
Stronger Medicine May Be Coming
Much of what the president set forth Friday has already been proposed in the House and the Senate. Housing advocates say much stronger measures are emerging in Congress. Some would make it harder for lenders to foreclose without first working in good faith with borrowers.