WASHINGTON — The Bush administration unveiled a plan Thursday that it hopes will calm jittery markets and ease a nationwide housing slowdown by helping 1.2 million Americans with adjustable-rate mortgages avoid foreclosure by refinancing or modifying their loans.
The plan, hammered out in private by the Treasury Department, federal bank regulators and the companies that hold eight out of 10 affected loans, targets hybrid adjustable-rate home loans given to subprime borrowers who had the weakest credit. These are loans that had low starter rates for two or three years, called 2/28's or 3/27's, before they jumped to much higher rates. President Bush's plan would freeze the low starter rates for five years for those who qualify, but many wouldn't.
There are an estimated 1.8 million subprime adjustable-rate mortgages, or ARMs, about to reset to higher rates in 2008 and 2009. An estimated 600,000 Americans who now hold subprime ARMs can't pay their low starter rates, so they won't qualify for Bush's five-year freeze on starter rates.
That leaves about 1.2 million subprime homeowners. Mortgage industry officials who helped craft the plan believe that about 600,000 of them may be eligible to refinance into fixed-rate loans. Another 600,000 would be steered toward loan modifications and could qualify for a five-year freeze of their initial loan rates.
To be considered for the plan, a loan must have been issued between Jan. 1, 2005, and July 31, 2007, and must have been sold by the original underwriter into the secondary market and bundled with other loans into mortgage bonds.
Treasury Secretary Henry Paulson, who brokered the voluntary deal, acknowledged that the administration's plan may only postpone a day of reckoning. But, he said, it buys valuable time for lenders and borrowers.
"This is not a silver bullet," he told reporters. "What five years does give us is ... a chance to work through this housing cycle and gives homeowners a chance to improve their credit situation."
If saving the economy is the goal, there's another motivation for lenders to push an anti-foreclosure plan. The House of Representatives Judiciary Committee is expected to move legislation next week that would change bankruptcy laws to allow judges to rework the terms of mortgages on primary residences.
"That's a lot of the behind-the-scenes dynamic that's going on," said Michael Calhoun, the president of the Center for Responsible Lending, a Durham, N.C., advocacy group that was among the first to warn of subprime problems.
Calhoun questioned the effectiveness of Bush's plan. He noted that the loan modifications apply to only primary loans, while about 40 percent of subprime loans involve second mortgages, sometimes called piggyback loans. Modifications can't happen unless the holder of the second mortgage gives its blessing, effectively agreeing to walk away from its loan.
"You take almost half the loans off the table right there," he said.
Mary Coffin disagreed. The executive vice president for loan servicing at Wells Fargo, a national bank, said that reworking the primary loan "puts the second (lien) holder in a better position" because foreclosure has been avoided.
There's much the Bush plan won't do.
It won't help someone who bought investment property or a vacation home. Nor will it be of great use to many in California, where home prices are so high that most loans are too big to qualify for refinancing under federal housing programs.
Florida and California, however, account for more than one of every four subprime adjustable-rate loans, and thus they stand to benefit from a plan that seeks to stave off foreclosures.
The plan also won't help borrowers in metropolitan areas who took out interest-only loans, option ARMs and other so-called exotic loans that flourished during the housing boom, which ended abruptly in 2006.
The plan's underlying premise is that preventing foreclosures is preventive medicine for the economy. A foreclosed property is believed to knock at least $5,000 off the value of neighboring homes. In cases of multiple foreclosures, entire communities suffer falling home prices.
"The rise in foreclosures would have negative consequences for our economy. Lenders and investors would face enormous losses," Bush said in the White House Roosevelt Room. "So they have an interest in supporting mortgage counseling and working with homeowners to prevent foreclosure."
Even before Bush's announcement, the Mortgage Bankers Association released data Thursday that showed the urgency behind Bush's plan. Subprime ARMs are only 6.8 percent of outstanding loans, but 43 percent of all foreclosures now under way, the group said.
The administration's plan comes weeks before the biggest number of subprime loans begin to reset; Paulson initially opposed the idea of freezing some ARMs. Critics complain that by coming so late, the plan fails to help those already in trouble.
"The fact that not one homeowner captured by today's delinquency and foreclosure data would be helped by this agreement proves that in no uncertain terms," said Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee and a presidential candidate.
Dodd convened a homeowners' preservation summit in April and said that Thursday's announcement was a step back from what lenders had promised him because it excluded hundreds of thousands of borrowers behind on loans and already facing foreclosure.
It's not clear how the Bush plan will be measured. Lenders didn't commit to a public disclosure process, saying that they'd communicate its progress to investors and that normal loan reporting data would indicate the number of modifications or refinances of subprime ARMs.
Chris Jennings is one of the statistics. The resident of Shasta Lake, Calif., faced a rate reset in February 2008 but learned Thursday from his loan servicer, Litton Loan Servicing, that he qualified for a modification. His monthly payment was about to jump by $588.
"I would never have been able to make that for more than a year. I would have been in foreclosure," he said, thrilled to learn that he now appears safe. "With this program, I will be able to make my own way."
FOR MORE INFORMATION
Details on how the loan modifications would work.
If you face possible foreclosure, you can call 1-888-995-HOPE for mortgage counseling.