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Bush, Paulson Unveil Mortgage Rescue Plan

Qualified borrowers could get five-year rate freeze

By Martin H. Bosworth
ConsumerAffairs.com

December 6, 2007

Bush and Paulson stopped shy of calling the plan a "bailout," saying that no federal money would be involved, but that federal guidelines would be needed to help the financial industry handle the potentially massive number of loan defaults that may occur as adjustable-rate mortgages (ARMs) begin to "reset" in 2008.

"[T]he current system for working out those problem loans would not be sufficient to handle the anticipated 1.8 million owner-occupied subprime mortgage resets that will occur in 2008 and 2009," Paulson said. " Instead, the industry needed a streamlined approach to address this increased volume."

Under the plan, homeowners with adjustable rate mortgages (ARMs) originated between Jan. 1, 2005, and July 31, 2007, not scheduled to reset between Jan. 1, 2008, and July 31, 2010, may be able to qualify for a five-year rate freeze at their present, lower payment rate.

Only homeowners who live in their homes can qualify for the plan, leaving speculators and those who bought homes to "flip" for a quick profit out in the cold.

But the plan also penalizes homeowners who are already struggling, as only borrowers who have been making payments regularly would qualify for the rescue. Those who have already fallen too far behind or are in default would not qualify for the plan.

Also, homeowners who are deemed able to pay their mortgages after the ARM resets would also not qualify.

Early leaked details about the plan drew lukewarm responses from both the financial sector and consumer advocates, not to mention other politicians.

New York Senator and Democratic presidential candidate Hillary Clinton, who has offered a mortgage rescue plan of her own, said the Bush/Paulson plan was "going to give struggling homeowners far less than they need."

"[I]t appears that the president is pushing a freeze for a very narrow group of borrowers," Clinton said. "That is unfortunate because this crisis demands a more comprehensive approach that is adequate for the scale of the problem."

Clinton supports a five-year rate freeze on ARMs, as well as a 90-day moratorium on foreclosures of owner-occupied homes with subprime adjustable-rate mortgages, and regular reports from the mortgage industry on the number of loans they are modifying.

Bad Business

Meanwhile, The Wall Street Journal editorial page excoriated the plan as violating the contracts of investors in mortgage-backed securities, who may lose money as a result of the rate freezes.

"When securitizers purchase loans, the Pooling and Servicing Agreements normally assign servicers a fiduciary duty to maximize cash-flows for the investors," the editors wrote. "In some cases, servicers can modify loan terms if this is consistent with 'standard industry practice.' This plan establishes a new 'standard industry practice.' We trust everyone is prepared to fight that out in court, maybe for years to come, because the lawsuits are going to test that 'standard' practice claim."

The Bush administration said it was supporting legislation offered by Republican Congressman Mike Castle (R-DE) that would immunize financial institutions that supported the rate freeze from shareholder lawsuits, just as airlines were largely shielded from liability following the 9/11 terror attacks.

Mortgage Maelstrom

No matter the preferred solution, consensus seems to be that something needs to be done to stem the mortgage and housing slump, as the bad news just keeps on coming.

National home values fell 1.3 percent in the third quarter of 2007, the largest drop in 25 years. Excess inventory of unsold homes and uncertainty in the financial markets due to tightening of credit and lending standards contributed to the fall.

The U.S. Conference of Mayors warned that the subprime mortgage meltdown would have massive economic consequences nationwide, contributing to as much as $1.2 trillion in lost home equity value from foreclosed homes, losses of over 500,000 jobs across metro areas and nearly $6.6 billion in lost tax revenue.

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