The plan unveiled yesterday by the Bush administration to stave off foreclosures by freezing mortgage rates is aimed at Americans in the greatest danger of losing their homes when payments on their adjustable loans jump, but it offers little hope for people already in trouble.
The rate freeze, generally for five years, would be limited to certain subprime borrowers with hardly any equity in their houses who can't refinance but who can afford their current payments. President Bush, who billed it as the industry's plan, said the major lenders that have signed on to the voluntary initiative also expect to help refinance subprime borrowers who are in better financial shape, either with FHA loans or other mortgages.
Bush said the two-pronged plan, which would use no taxpayer money, could help up to 1.2 million homeowners. But some economists believe the number is likely to be much lower. Moody's Economy.com puts it at 500,000 - half helped by the rate freeze and half by the refinancing.
In Maryland, more than 25 percent of homeowners with subprime adjustable-rate mortgages were late on their payments or in the foreclosure process this summer, according to numbers released yesterday by the Mortgage Bankers Association. Many - if not all - would be disqualified for the rate freeze because they're too far behind, even if they meet other requirements.
"I feel like I'm running triage," said Anne Balcer Norton, director of the foreclosure prevention division for St. Ambrose Housing Aid Center in Baltimore, which has seen its calls for help triple from a year ago.
She called the rate freeze "a very good starting point" but said "it fails to address all of the homeowners that are currently in default, and that's a number that's just growing regardless of reset."
The HOPE NOW Alliance of lenders and other industry players that agreed to the plan includes servicers who handle more than eight out of 10 subprime mortgages, the Treasury Department said. Subprime loans are higher-interest-rate products designed for borrowers with imperfect credit. They have grown to 13 percent of the market from less than 2 percent a decade ago as brokers aggressively marketed loans with low teaser rates and buyers stretched to buy during the housing boom.
Only certain subprime borrowers will be eligible for the rate freeze. They must have loans they got between Jan. 1, 2005, and July 31 of this year. They must be facing their first interest-rate resets between Jan. 1, 2008, and July 31, 2010, with a payment increase of more than 10 percent. They must currently be no more than 30 days late on their mortgage, and they can't have been 60 days late more than once in the past year.
Mortgage holders - often Wall Street investors rather than lenders - will take a hit from rate freezes, but they could take a bigger hit if a flood of loans go into foreclosure at a time of declining housing prices. Government officials are also eager to avoid the falling property values, lower tax collections and economic drag caused by sharply rising foreclosures, not to mention the political fallout. The Mortgage Bankers Association said yesterday that the share of loans that lenders were trying to foreclose on reached a record high this summer: about 1.7 percent, or 770,000 homes. And nearly 6 percent of all mortgage holders were delinquent, the association said.
Economists say the impact of quickly rising foreclosures has such a wide ripple - hurting property values, tax collection, consumer spending and job creation - that they threaten the economy as a whole.
Mark Zandi, chief economist at Economy.com, said 3.5 million loans are expected to go into default from next month through July 2010. If 500,000 homes are saved by the HOPE NOW rate freeze and refinancing, as he forecasts, that's just about 15 percent.
"I don't mean to discount that - that's important as a contribution," Zandi said. "But it seems to me it's not going to forestall what will be a very severe housing downturn and its ill effects on the broader economy."
Treasury Secretary Henry M. Paulson Jr., speaking at a news conference yesterday, said several times that he knows the plan "is not a silver bullet."
"We face a difficult problem for which there is no perfect solution," he said.
It's unclear how many people the rate freeze and refinancing plan could help in Maryland. But many won't be eligible - not only the subprime borrowers facing the imminent loss of their homes, but also the 24,000 prime borrowers whose adjustable-rate loans will reset during the same period, according to First American LoanPerformance data.
About 19,000 subprime borrowers in the state are due for loan resets during those months, but it's unclear how many of them got their loans in the time period required for the freeze.
Subprime loans, though especially concentrated in the state's urban areas, are not a city-only problem. Thirty percent of the loans to homebuyers last year in middle-class Baltimore County and affluent Montgomery County were subprime, according to new research released yesterday by the Baltimore Homeownership Preservation Coalition. Charles County in Southern Maryland saw nearly 40 percent of buyers take out subprime mortgages.
Researchers found pockets across the state where more than 30 percent of subprime borrowers are late on their mortgage payments.
"There's some predatory practices, no doubt, but I think there was a lot of consumer buy-in too," said Rahn Vincent Barnes, community development director for Provident Bank of Maryland, who notes that some of the foreclosures hitting nice suburban neighborhoods were fueled by buyers stretching to get bigger homes. "There was a willing public who said, 'I want to buy this house - find me a way.'"
The new numbers are a preview of a full report expected in January, conducted by The Reinvestment Fund and paid for by several nonprofit organizations. Advocates hope the detailed look at the scope of Maryland's foreclosure problem will help as they figure out what else homeowners need besides rate freezes.
"Nothing is going to be one- size-fits-all," said Joanna Smith- Ramani, co-chair of the Baltimore Homeownership Preservation Coalition.
Criteria for participation in plan announced yesterday by the Bush administration to provide a five-year freeze on mortgage rates for borrowers facing the threat of default on subprime mortgages:
Live in the residence covered by the mortgage
Have a loan that was issued between Jan. 1, 2005, and July 31, 2007
Have interest rates that will reset between Jan. 1, 2008, and July 31, 2010
Have a monthly payment that would rise more than 10 percent
Be "current" in mortgage payments; that means no more than 30 days late
Have less than 3 percent equity in the home
Be unlikely to qualify for refinancing
[Source: American Securitization Forum]