Relief as foreclosures rise

WASHINGTON — The Bush administration offered hope to beleaguered homeowners Thursday with a five-year freeze in loan rates for those who qualify, even as the number of bad mortgages jumped to the highest level ever.

The plan represented the administration's biggest action yet to show it is dealing aggressively with the mortgage crisis. The escalating problem is becoming a political issue and threatening to push the country into a recession.

"The holidays are fast approaching and this will be a time of anxiety for Americans worried about their mortgages and their homes," Bush said. The administration's efforts, he said, are "a sensible response to a serious challenge."

The initiative would hold down rates for certain subprime mortgages, which are loans offered to borrowers with spotty credit histories. These loans offer initial "teaser" rates for the first two to three years before rates climb sharply, potentially increasing monthly payments by as much as 30 percent.

Bush released his plan on a day the Mortgage Bankers Association reported that the number of mortgages entering the foreclosure process in the July-September period set a record. Behind those foreclosures is a steep slump in the housing market. After a five-year boom, home sales are plunging and prices declining in many parts of the country. More foreclosures mean more homes dumped on a glutted market.

The housing slump has caused multibillion-dollar losses at some of the largest banks and investment firms and roiled financial markets. All these problems are expected to drag down economic growth to near recession levels over the final three months of this year and into early 2008.

The administration hopes the rate freeze will slow the pace of foreclosures, buying time for the housing market to stabilize and begin to recover. A rebound in sales and home prices will allow struggling homeowners to switch their current adjustable-rate mortgages to more affordable fixed-rate loans.

David Schneider, president of Washington Mutual's home-loan division, called the proposal "a positive step for borrowers who are unable to handle an increase in their monthly payment." (WaMu is a member of the mortgage-industry group that helped hash out the plan.)

WaMu also is working to implement another aspect of the plan, intended to make it easier for loan-servicing companies to modify existing loans. The Seattle-based thrift, one of the nation's largest home lenders, expects to have that process up and running in a matter of weeks.

"Our firm belief is that early intervention combined with expanded options is instrumental to helping our customers find ways they can overcome financial obstacles to keep their home," Schneider said in a statement. "We view foreclosure as a last resort."

But Glenn Crellin, director of the Center for Real Estate Research at Washington State University, said any benefit from the relief plan likely will be modest.

"It's going to help some, but I don't think it's going to help a large number of borrowers," he said. "It's certainly not a panacea."

At his White House announcement, Bush insisted the country's underlying economic fundamentals were sound. But critics said his administration was slow in reacting to the housing crisis and the delay had worsened the slump. Some contended Bush's plan was too narrowly focused.

But skepticism was rampant. "I've been doing this for 30 years and haven't seen the government do anything that's ever worked," said longtime mortgage-industry executive William Dallas, who founded subprime lenders First Franklin Financial and Ownit Mortgage Solutions.

Altering the terms of loans pooled into mortgage securities could cut investment in the U.S. mortgage market — particularly from overseas sources, said Richard Gottlieb, who leads law firm Dykema's consumer financial-services practice in Chicago. That money is crucial to the functioning of the mortgage market, which has already seen funding dry up this year as defaults have soared.

The administration said its plan could help 1.2 million homeowners — either through a freeze or quicker ways to assist homeowners refinance.

But the Center for Responsible Lending, which battles predatory lending, estimated that only 145,000 homeowners would qualify for the freeze because the criteria are too narrow.

Bush said homeowners concerned about mortgages that are about to jump up should seek help before they fall behind in their payments.

For starters, they can call a hotline operated by an industry alliance known as Hope Now: 1-888-995-Hope.

An estimated 1.8 million homes have subprime mortgages that are scheduled to reset in the next two years. Those mortgages were initially taken out with rates of around 7 percent to 8 percent.

Under the scheduled increases, the rates will climb as high as 11 percent in the months ahead without the freeze. That increase could add an additional $350 to a typical monthly mortgage payment of $1,200.

The freeze will be available only to homeowners who have not fallen behind on their payments at the lower introductory rates and who are living in the homes. This requirement would exclude people who bought investment properties hoping to profit from the housing boom.

The Federal Reserve will announce stronger lending standards this month, while the Housing and Urban Development Department and federal banking regulators are acting to improve disclosure requirements, Bush said.

The mortgage industry and government officials who took part in crafting the plan are united in saying it's the borrowers who benefit.

Meanwhile, consumer groups and Democrats say it's industry that was really bailed out.

If fully implemented, some mortgage lenders and a portion of borrowers with poor credit could see their financial situations stabilized, while investors around the world who bought securities backed by U.S. mortgage loans could see lower profits.

Many, though, were quick to say that the plan helps businesses — especially big lenders hurt hardest in the crippled mortgage market — more than the 1.2 million homeowners it is supposed to aid.

"It's more realistic to say the plan is saving American lenders" than to say it is saving homeowners, said Brian Brady, a managing director at San Diego-based mortgage banking firm World Wide Credit.

Material from WaMu and WSU provided by Seattle Times business reporter Drew DeSilver.