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President, Mortgage Lenders Announce Plan to Help Some Homeowners Facing Foreclosure
by Mike Wallace
Late last week, President Bush announced an agreement among the major mortgage financial institutions that will lead to relief for thousands of homeowners facing foreclosure due to rising interest rates on subprime adjustable-rate mortgage loans.
Under the agreement, mortgage lenders and servicers will begin to proactively identify homeowners likely to default on their subprime adjustable-rate loans and, significantly, will freeze interest rates at the pre-adjustment level for five years for families meeting certain eligibility requirements.
The goals of the interest rate freeze are to increase stability and confidence in the housing market by reducing foreclosures, and to give families with subprime adjustable-rate mortgages enough time to find a solution to avoid their interest rate reset. According to the Mortgage Bankers Association, U.S. home foreclosures hit a record high of 351,000 this quarter.
Earlier this year, NLC’s leadership identified reform of the housing finance system as a top legislative priority for Congressional attention, citing the civic and financial costs of high foreclosure rates to homeowners and cities. NLC has been involved in the year-long Congressional effort to ameliorate the foreclosure crisis and protect future homebuyers.
“We commend the President for recognizing that the current foreclosure crisis is a significant challenge for the country,” said NLC Executive Director Donald J. Borut. “We look forward to working with the administration and Congress as they find solutions that reach the largest possible number of homeowners facing foreclosure.”
To achieve this agreement, federal negotiators, led by U.S. Department of Treasury Secretary Henry Paulson, convened credit counselors, investors and the nation’s largest mortgage lenders that together manage approximately 80 percent of affected mortgages into an alliance called Hope Now. Although the Department of Treasury guided the discussions, Paulson pointed out that the Hope Now plan to freeze interest rates is a voluntary, industry-driven solution, requiring no new regulations or legislation. When asked if the new program is a federal bailout, Paulson responded that no federal funding would be used to support the plan.
The Hope Now plan received a lukewarm response on Capitol Hill with some members of Congress concerned it does too little for too few.
According to an analysis cited in The Washington Post by investment banker Barclays Capital, of the 2.2 million subprime adjustable rate mortgages that are expected to reset in 2008, only 240,000 would be eligible for a mortgage rate freeze under the President’s proposal.
House Financial Services Committee Chairman Barney Frank (D-Mass.), whose committee oversees housing issues, welcomed the proposal, but Senate Banking, Housing, and Urban Affairs Committee Chairman Christopher Dodd (D-Conn.) criticized the Administration for settling “for less than they should — or could — have achieved.”
The Hope Now Plan
The Hope Now plan to freeze interest rates is aimed at subprime borrowers who can afford to make mortgage payments at their initial lower rate but will be unable to make payments after their interest rates adjust upward, and are unable to qualify for refinancing. However, the plan's strict requirements mean that a number of subprime borrowers in that limited category will not be eligible for the interest rate freeze.
Only those borrowers whose interest rate resets begin in 2008 or after are eligible. In addition, those borrowers must not have missed a mortgage payment in the last 12 months and must not currently be delinquent.
Moreover, borrowers judged to have enough income to make payments at the higher rate are not eligible; nor are those who are judged unable to make payments at the lower rate. Finally, those who have already lost their homes due to inability to pay at a higher interest rate are not covered by the plan.
During the announcement, Secretary Paulson stated the number one obstacle facing the industry in implementing the plan is inability to reach the borrower before foreclosure proceedings begin. To take the best advantage of the Hope Now plan, homeowners must contact their lender or loan servicer, whose phone number appears on monthly statements, before missing a single mortgage payment. Homeowners can also be put in contact with their lender or loan servicer, or an independent mortgage counselor, by calling a toll free number set up by the Hope Now alliance: 1 (888) 995-HOPE.
In addition to speaking about the new plan, President Bush used the announcement as an opportunity to again urge Congress to pass bills to modernize the Federal Housing Administration (FHA) and reform the Government Sponsored Enterprises (GSE), Fannie Mae and Freddie Mac.
FHA modernization would allow FHA to refinance a greater number of subprime adjustable-rate mortgages into federally insured conventional mortgages with lower interest rates, especially in high-cost areas. GSE reform would also help subprime borrowers by permitting the housing finance giants Fannie Mae and Freddie Mac to purchase a greater number of loans. Although both bills, which NLC supports, have passed the House, they have stalled in the Senate.
In last week’s announcement, the President and Secretary Paulson also introduced a new legislative initiative to allow state and local governments to have a more prominent role in protecting homeowners against foreclosure. Under current law, cities and states can issue tax-exempt bonds to finance new mortgages for first-time homebuyers. Under the proposed legislation, which Congress would need to approve, cities and states would be able to issue tax-exempt mortgage bonds to refinance existing loans, which would help homeowners, but would also increase cities’ exposure to risk from the struggling mortgage market.
President Bush also noted that the Federal Reserve will be issuing new mortgage rules in the coming weeks designed to crack down on some of the more egregious mortgage practices, such as abusive prepayment penalties. The Department of Housing and Urban Development, in conjunction with the Federal Reserve, will soon issue new mortgage disclosure requirements designed to make mortgage contracts clearer to consumers.
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