In unveiling a plan to help more than one million struggling homeowners, the Bush administration and the mortgage industry have embarked on a controversial project: picking winners and losers from the rubble of the subprime-mortgage meltdown.
Under the deal, formally released yesterday, the industry would voluntarily help as many as 1.2 million homeowners who are heading for trouble paying their subprime mortgages but aren't yet lost causes. For some homeowners, loan-servicing companies will agree to freeze mortgages at their low introductory rates. In other cases, credit counselors or loan servicers will walk mortgage holders through refinancing processes.
The deal won't provide relief to many subprime-mortgage holders: These include borrowers who are now in foreclosure, have already refinanced their homes or are more than 60 days delinquent on more than one payment over the past year. In some cases, people with good credit scores will be excluded. Also left out are those deemed able to afford the higher interest rates scheduled to replace their introductory rates over the next The initiative could help stabilize falling home prices and rising foreclosure rates, buoy the mortgage market and provide a modicum of comfort to investors watching the housing crisis bleed into the broader economy.
But it also sets what promises to become a battle line as the subprime crisis plays out over the coming election year. Some critics, especially Democrats, say the plan doesn't go far enough to protect vulnerable homeowners against foreclosure. Others, including some homeowners, as well as those who have watched from the sidelines as home prices have soared in recent years, charge that the plan amounts to a bailout for financially reckless borrowers.
The agreement covers homeowners who have taken out subprime mortgages, those offered typically to high-risk borrowers. About 1.8 million subprime loans are adjustable-rate mortgages, or ARMs, that carry low introductory rates that are set to expire in the next two years and adjust upward. These ballooning mortgage payments would threaten to produce a wave of foreclosures and a spiral of lower home prices and tightening credit.
The housing crisis is spreading beyond this relatively small subprime universe, causing turmoil on Wall Street and raising the specter of an economic slowdown. In the third quarter, home foreclosures hit their highest rate since at least 1972, according to the Mortgage Bankers Association. Prime adjustable-rate loans -- not covered in the industry's rescue plan -- accounted for 18.7% of mortgages starting foreclosure, the second-highest proportion behind subprime adjustable-rate loans. The overall delinquency rate is the highest since 1986, with some 2.64 million borrowers nationwide behind on payments for their first-lien mortgages for residences. more...
Friday
Greenspan Says Forcing Lenders To Alter Terms Would 'Tax' Economy
Former Federal Reserve Chairman Alan Greenspan said that compelling lenders to alter mortgage contracts would be a damaging tax on the economy and it would be less harmful to simply give the homeowners money.
Mr. Greenspan, clarifying remarks he made on television Sunday, said in an interview with The Wall Street Journal yesterday, "I'm saying instead of in effect 'taxing' financial institutions and giving the funds to the homeowners, we'd be far better off, as far as the future structure of our financial markets are concerned, to do it strictly with cash. Do it out in the open. Do it cleanly and with transparency, not by hidden processes."
Mr. Greenspan said on ABC News's "This Week" that "cash is available and we should use that in larger amounts, as is necessary, to solve the problems." But he wasn't specific about what form that cash would take, and some have interpreted his comments as advocating a massive fiscal bailout, a stance at odds with his longstanding reputation as a fiscal hawk.
Assuming the government is going to act to help out homeowners, Mr. Greenspan clarified that he would like it to do so in a way that minimizes the distortions to private behavior, which economists say can result in the misallocation of resources, less efficient markets and a lower standard of living.
He said, "Emergency aid is what I'm talking about, similar to what government does in natural disasters. I would make the criteria for who gets payments exactly the same for who would get rate relief. You still have the problem of drawing a line between those who were irresponsible and those who are innocent victims. That's a tough political value judgment to make." But once that judgment is made, "it is far less damaging to the economy and far simpler, without the ongoing consequences for the markets, if you give homeowners cash." more...
Mr. Greenspan, clarifying remarks he made on television Sunday, said in an interview with The Wall Street Journal yesterday, "I'm saying instead of in effect 'taxing' financial institutions and giving the funds to the homeowners, we'd be far better off, as far as the future structure of our financial markets are concerned, to do it strictly with cash. Do it out in the open. Do it cleanly and with transparency, not by hidden processes."
Mr. Greenspan said on ABC News's "This Week" that "cash is available and we should use that in larger amounts, as is necessary, to solve the problems." But he wasn't specific about what form that cash would take, and some have interpreted his comments as advocating a massive fiscal bailout, a stance at odds with his longstanding reputation as a fiscal hawk.
Assuming the government is going to act to help out homeowners, Mr. Greenspan clarified that he would like it to do so in a way that minimizes the distortions to private behavior, which economists say can result in the misallocation of resources, less efficient markets and a lower standard of living.
He said, "Emergency aid is what I'm talking about, similar to what government does in natural disasters. I would make the criteria for who gets payments exactly the same for who would get rate relief. You still have the problem of drawing a line between those who were irresponsible and those who are innocent victims. That's a tough political value judgment to make." But once that judgment is made, "it is far less damaging to the economy and far simpler, without the ongoing consequences for the markets, if you give homeowners cash." more...
Tuesday
U.S. Mortgage Crisis Rivals Savings and Loan Meltdown
To ease the pain, the Federal Reserve has cut short-term interest rates twice and is expected to cut them further tomorrow. The Bush administration has also pressed for private-sector curative measures. First, it urged big banks to create a new entity to buy some mortgage-linked securities that don't have a ready market now. And a plan finalized last week calls for freezing interest payments on perhaps hundreds of thousands of qualifying homeowners whose mortgage notes are set to rise. (See a primer: Will the Rate Freeze Help You?) Both ideas are controversial. They are hailed by some as well-conceived financial first aid and criticized by others as inadequate -- or an impediment to crisis resolution.
Buying Time
When the Fed began to raise interest rates in 2004, mortgage rates also began to climb. Initially, home prices kept rising as home buyers turned to mortgages with low initial payments, assuming they could sell or refinance before the mortgage rate adjusted higher. Borrowers who had trouble making payments could easily buy more time by refinancing into bigger loans, thanks to higher prices. That kept defaults low and encouraged rating agencies to continue blessing securities backed by such mortgages with high ratings.
Then, in places like Florida, buyers stopped coming. Mr. Delzio listed one home, on which he spent $203,000, at $210,000. He then cut the price repeatedly, finally to $175,000, barely more than the mortgage. He now rents it for $800 month, well short of the $1,400 monthly carrying cost.
Selling is made all the more difficult by the ample supply of homes and vacant land for sale in the area. Nationally, there were 2.1 million vacant homes for sale in the third quarter, equal to 1.6% of all the homes in the country -- a record.
At the end of 2006, the value of all homes in the U.S., excluding rentals, peaked at 153% of gross domestic product (or about $21 trillion) -- the highest level in at least six decades. By Sept. 30, that had edged down to 150% of GDP as home prices began to drop. With huge inventories of unsold homes soon to swell with foreclosed properties, that is likely to continue.
Falling home prices make consumers poorer and less ready to spend, and they make it harder to borrow against home values -- even if consumers are current on their payments....more
Buying Time
When the Fed began to raise interest rates in 2004, mortgage rates also began to climb. Initially, home prices kept rising as home buyers turned to mortgages with low initial payments, assuming they could sell or refinance before the mortgage rate adjusted higher. Borrowers who had trouble making payments could easily buy more time by refinancing into bigger loans, thanks to higher prices. That kept defaults low and encouraged rating agencies to continue blessing securities backed by such mortgages with high ratings.
Then, in places like Florida, buyers stopped coming. Mr. Delzio listed one home, on which he spent $203,000, at $210,000. He then cut the price repeatedly, finally to $175,000, barely more than the mortgage. He now rents it for $800 month, well short of the $1,400 monthly carrying cost.
Selling is made all the more difficult by the ample supply of homes and vacant land for sale in the area. Nationally, there were 2.1 million vacant homes for sale in the third quarter, equal to 1.6% of all the homes in the country -- a record.
At the end of 2006, the value of all homes in the U.S., excluding rentals, peaked at 153% of gross domestic product (or about $21 trillion) -- the highest level in at least six decades. By Sept. 30, that had edged down to 150% of GDP as home prices began to drop. With huge inventories of unsold homes soon to swell with foreclosed properties, that is likely to continue.
Falling home prices make consumers poorer and less ready to spend, and they make it harder to borrow against home values -- even if consumers are current on their payments....more
Monday
U.S., Banks Near a Plan to Freeze Subprime Rates for Borrowers
WASHINGTON -- The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations.
An accord could reassure investors and strapped homeowners, both of whom are anxious as interest rates on more than two million adjustable mortgages are scheduled to jump over the next two years. It could also give a boost to the Bush administration, which is facing criticism for inaction amid the recent housing turmoil.
The plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies including Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. People familiar with the talks say the individual members have agreed to follow any agreement reached by the coalition, which is called the Hope Now Alliance.
Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.
Many subprime loans carry a low "teaser" interest rate for the first two or three years, then reset to a higher rate for the remainder of the term, which is typically 30 years in total. In a typical case, the rate would rise to around 9.5% to 11% from 7% or 8%. That would boost an average borrower's payment by several hundred dollars a month.
Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. Under one scenario, the freeze could run as long as seven years. The parties are developing standard criteria that would determine eligibility. The criteria should be finalized by the end of year. more...
An accord could reassure investors and strapped homeowners, both of whom are anxious as interest rates on more than two million adjustable mortgages are scheduled to jump over the next two years. It could also give a boost to the Bush administration, which is facing criticism for inaction amid the recent housing turmoil.
The plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies including Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. People familiar with the talks say the individual members have agreed to follow any agreement reached by the coalition, which is called the Hope Now Alliance.
Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.
Many subprime loans carry a low "teaser" interest rate for the first two or three years, then reset to a higher rate for the remainder of the term, which is typically 30 years in total. In a typical case, the rate would rise to around 9.5% to 11% from 7% or 8%. That would boost an average borrower's payment by several hundred dollars a month.
Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. Under one scenario, the freeze could run as long as seven years. The parties are developing standard criteria that would determine eligibility. The criteria should be finalized by the end of year. more...
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