Bush offers ways to aid faltering borrowers

The Baltimore Sun

President Bush outlined steps yesterday designed to help homeowners who can no longer afford their mortgages, including broader access to federally backed mortgage insurance.

But mortgage professionals and community activists were split on how far the government should go in providing assistance - and how many people should benefit from it.

In his Rose Garden address yesterday, Bush took pains to note that his administration's proposal should not be considered a "bailout" of homeowners who recklessly extended themselves or mortgage lenders who peddled products that left their customers imperiled.

"It's not the government's job to bail out speculators or those who made the decision to buy a home they knew they could never afford," Bush said.

"Yet there are many American homeowners who can get through this difficult time with a little flexibility from their lenders or a little help from their government."

The mortgage crisis began earlier this year with the subprime market, which provides loans to buyers with weak credit histories. With so many homeowners defaulting as rates on adjustable loans rose, some lenders slid into bankruptcy. That created a credit crunch beyond the subprime market that shook international financial exchanges and gained the government's attention.

The proposals, Bush's first effort to bolster the ailing market, come less than a month after he played down the need for federal intervention, saying at the time that the U.S. housing market was heading for a "soft landing." Some Democrats in Congress and those running for president have criticized Bush for not doing enough to deal with the crisis.

The Bush proposal calls for greater outreach to homeowners at risk and a temporary tax break for those refinancing. But a central element would allow the Federal Housing Administration to issue mortgage insurance for more families, including those with poor credit who face a higher risk of defaulting on their loans.

The FHA charges a set price for such insurance, administration officials said. But by charging more for riskier customers, the program - paid for through fees on loans - could generate enough money to cover more customers. Owners with adjustable-rate mortgages who can't afford their new, higher payments would be able to refinance into another loan with FHA backing, at a lower interest rate and lower monthly payments.

The FHA also faces limits on the size of loans it backs and needs congressional approval to change them. Lawmakers have said they will consider raising the size of loans that FHA can insure - to $417,000 from $362,790 - to include more homeowners, particularly in higher-priced areas.

FHA estimates that Bush's proposals could aid 240,000 homeowners this year, or 80,000 additional people. That's fewer than the 2 million to 3 million people who could soon face foreclosure.

The delinquency rate on subprime mortgages has skyrocketed, with 17.5 percent of the loans 60 days or more past due in June, including those that are in foreclosure, according to the latest data from First American Loan Performance.

While that's a sharp increase over historical levels, it represents roughly 1.4 million borrowers across the country, or 2.5 percent of the total. Still, many experts expect defaults to increase as more adjustable-rate mortgages reset for the first time during the next year.

But many in the mortgage industry don't support government assistance for everyone.

"There is a risk in going too far," said Greg McBride, senior financial analyst at Bankrate.com, which provides consumers information on mortgage rates. "You want to create opportunities to refinance and retain homeownership status for borrowers that are making a good-faith effort."

Those are people, for example, who bought a house and have made regular payments. But when they went to refinance ahead of an expected jump in their rates, they found that the house had lost value. Lenders refuse to refinance at lower rates, and homeowners no longer can afford their payments.

That is a different issue from those who never should have qualified for their loans to begin with, McBride said.

Others agreed that the government assistance should go only to the homeowners who have taken on a responsible level of debt and had been making payments, as required by the Bush proposal.

"Certainly, there is a class of people in foreclosure that probably caused the problem, not the product," said Thomas Shaner, executive director of the Maryland Association of Mortgage Brokers.

"People need to take responsibility for what they are signing onto. If the government can help those who are responsible, that's a good thing."

Many real estate groups also say the changes that widen FHA's role are long overdue. They include the National Association of Home Builders and the National Association of Realtors.

The Mortgage Bankers Association said in a statement that the changes will give the FHA flexibility to meet "evolving needs of borrowers. ... In addition to its vital function helping low and moderate income Americans buy their homes, FHA can play a crucial role in helping stranded borrowers keep their homes."

Then there are the community groups and lenders who say the efforts don't go far enough, including Bruce Marks, chief executive of the Neighborhood Assistance Corporation of America, which provides loans to low- and moderate-income people and those considered subprime borrowers.

The rates on some mortgage products are rising to levels many homeowners can't afford. And, he says, mortgages were sold to customers along with promises that they would be able to refinance before a big jump in the payments, but then they couldn't for a number of reasons.

He said these people should not be put in government-backed programs - rather, the lenders who got them into trouble should be required to get them out.

Bush should tell regulators to require lenders to restructure loans into fixed mortgages from the adjustable-rate mortgages, or ARMs, that balloon and often become unaffordable, Marks said.

"That means interest rates should be reduced and mortgage payments should be reduced to the level they were before the higher rates kicked in," he said. "These aren't ARMs; these are strangulation ARMs."

meredith.cohn@baltsun.com david.nitkin@baltsun.com

Staff reporter Laura Smitherman contributed to this article.

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