No silver bullet for borrowers

President Bush’s plan to slow the mortgage meltdown could help prevent hundreds of thousands of people from losing their homes, but many others would get no relief -- and the plan’s effect on the broader economy remained a topic of sharp debate.

Under the plan outlined Thursday, lenders would be given broad latitude to fix troubled loans, notably those with low introductory teaser rates that will reset to higher payments between Jan. 1, 2008, and July 31, 2010.

Such modifications would remain voluntary, however, triggering strong criticism from Democrats and consumer advocates.

The biggest winners could be struggling borrowers who have kept current with their adjustable-rate loans but cannot afford to refinance when their teaser rates expire. There are an estimated 600,000 of them, and they might be able to have their low rates frozen for five years.

But those who took out teaser-rate loans to speculate in the housing market probably would be losers because the plan excludes mortgages in which the borrower doesn’t live in the home as a primary residence.

Borrowers whose loans have already reset to higher rates won’t necessarily get relief either, nor would an estimated 600,000 people who can’t keep up with their payments even at the low introductory rates. Officials acknowledged that for those borrowers, foreclosure and a return to the rental market are probably inevitable.

By some estimates, nearly 2 million Americans are in danger of losing their homes over the next two years. Economists say a wave of foreclosures that large could sink the economy into a recession, raising unemployment and spreading hardship to many more people.

Treasury Secretary Henry M. Paulson Jr., who spent weeks spearheading negotiations among mortgage servicers, investors and groups representing borrowers, said troubles in the housing market were the “biggest risk to the economy.”

“This is not a silver bullet,” Paulson said after meeting with Bush. “We can’t put together an industrywide initiative and suddenly make the excesses and the bad lending practices and so on of the last number of years go away.”

Yet economist Edward Leamer, director of the UCLA Anderson forecast, says the Bush plan does exactly the opposite of what is needed to revive the housing market by artificially propping up housing values.

“The market needs buyers,” Leamer said, and they need to be lured by lower prices and lower mortgage rates. He added that the Bush plan “is deleterious to both of those ends” by enabling people to stay in houses they can’t afford while driving lenders to raise rates on new mortgages.

Consumer advocates, however, contend that many homeowners facing foreclosure were misled by brokers, who earn higher fees on sub-prime loans designed for people with shaky credit -- the kind of loans that are most likely to go into default.

On Thursday, calls surged to a national foreclosure-avoidance hotline -- (888) 995-HOPE -- that Bush mentioned, despite the president having gotten the number wrong (he said it was an 800 number).

Consumer Credit Counseling Service in San Francisco, one of the nonprofits fielding calls to the line, previously had been receiving 200 to 300 calls a day, spokeswoman Erica Sandberg said.

“So far today, we’re going on 1,500,” she said late Thursday afternoon. “Unfortunately, a lot of callers don’t realize that what was announced today is tailored to a fairly small group of people. Most of these callers we can’t help.”

Debbie Clavon, a stay-at-home mom in Los Angeles, said she had been awaiting the president’s announcement in hope that it would provide some relief. But her loan has already reset twice.

Clavon and her husband, an executive assistant at a bank, bought their home in the Hyde Park area in 2003 and refinanced to an adjustable sub-prime loan two years later. Their monthly payments, which started at $1,450, are now $2,300.

“We knew it was going to happen but financially were we prepared? No,” said Clavon, 35.

Although the financial markets reacted favorably to Bush’s plan, some analysts and investors objected to what they saw as government interference in the marketplace. Some expect mortgage investors to ultimately sue loan servicers if the modifications under the Bush plan are carried out extensively.

“Anything approaching price controls is simply unacceptable on its face,” said Joseph Brusuelas, chief U.S. economist at financial consultant IDEAglobal in New York.

But George Miller, executive director of the American Securitization Forum, which represents people who bought securities tied to mortgage loans, said investors would lose more without the Bush plan than with it.

“Since foreclosure is typically the most costly means of resolving a defaulted mortgage loan and produces the largest losses for investors, it is usually the least preferred option if other alternatives are possible,” he said.

Mortgage investors fearful of losing money caught at least one break Thursday when the Internal Revenue Service announced a new rule that would reduce their tax liability when mortgage-backed securities are modified. The technical change in the definition of a mortgage “default” makes it less likely that investors would have grounds to sue servicers for modifying the terms of the loans.

“With the investor community on board and as a clear beneficiary of this approach, the risk of litigation should be manageable,” Paulson said.

Bush said the Treasury-brokered plan is only one of a number of proposals needed to address various aspects of the housing crisis. Congress is working on legislation that would expand the number of Federal Housing Administration-insured mortgages available to low-income borrowers, as well as measures to change the bankruptcy and tax codes to assist those whose homes lose value.

In addition, this month the Federal Reserve is expected to announce national licensing standards for mortgage brokers, hoping to reduce the kind of predatory lending that duped many borrowers into taking out loans they could not afford.

The initiative prompted strong criticism, however, among Democrats who said that it was far from clear how much the plan would accomplish, and that the White House should have acted more forcefully earlier to salvage troubled loans and stabilize the mortgage industry.

“The administration had a golden opportunity to push for a comprehensive agreement to address this crisis,” said Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee. “Sadly, they settled for less than they should -- or could -- have achieved.”

Consumer advocates said the plan would do more to protect Wall Street than struggling borrowers.

“This grossly inadequate plan is likely to harm the president’s desire to close the minority homeownership gap and create an ownership society,” said Robert Gnaizda, general counsel of the Greenlining Institute, which represents low-income borrowers.

Nonetheless, there was some instant evidence of cooperation Thursday. Wells Fargo & Co. said it would start offering an interest-rate freeze on some sub-prime mortgage loans within the next few weeks as part of the administration’s plan.

Of the estimated 1.8 million sub-prime borrowers who live in their homes and who face resets between Jan. 1, 2008, and July 2010, about 600,000 are likely to face foreclosure because they cannot make even their teaser-rate payments.

Another roughly 600,000 people probably can qualify for refinancing without any assistance.

The focus of the Bush plan is another group of people -- also estimated at about 600,000 -- who are current on their loan payments at the introductory rate but probably will go into default after the payment balloons. Some of those borrowers might be able to afford higher payments, but in most cases they are expected to be granted a five-year freeze on their introductory interest rate.

Members of Congress had strong if mixed reactions to the White House plan, along with a widespread view that the growing troubles in the mortgage industry required leadership from the administration.

“I welcome it,” said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. But some lawmakers complained that the White House should have acted earlier.

“We may never know how many borrowers could have kept their homes if the process had started sooner rather than later,” said Rep. Maxine Waters (D-Los Angeles).

maura.reynolds@latimes.com

jonathan.peterson @latimes.com Times staff writers Peter Y. Hong, Andrea Chang, E. Scott Reckard and Tom Petruno contributed to this report.