Mortgage plan would freeze rates

Times Staff Writers

Seeking to gird the nation’s economy against a potential tidal wave of foreclosures, the Bush administration will release a plan today that is expected to block many mortgages from adjusting to higher rates for as long as five years.

Administration officials acknowledged privately Wednesday that the plan was likely to face objections from low-income borrowers who won’t be helped, and from investors who backed now-troubled sub-prime home loans that are at the heart of the mortgage crisis.

But they said the goal was to keep rising foreclosures from tilting the economy toward recession, and that helping specific groups was a secondary objective.


“Foreclosure prevention is the goal,” said one official, who spoke on condition of anonymity because the plan had not yet been announced. “There are going to be questions, for sure, no matter how it’s done.”

The five-year freeze will be offered to borrowers who live in their homes, are current on their mortgage payments, have accrued at least some equity in their homes and whose income indicates they cannot afford higher payments.

In addition to freezing some mortgages that would otherwise begin to carry much higher interest rates and monthly payments, the voluntary plan will call for speeding up the process of bringing lenders together with low-income homeowners to renegotiate mortgages on terms that the borrowers can afford.

Such deals mean lenders would get less than the sharply higher rates called for in the original adjustable-rate loans, but more than many would get through foreclosure.

Just which borrowers get help could become a sticking point, however.

As talk of a rate freeze gathered traction in recent weeks, some complained that lenders would be bailing out people who knowingly took out bigger loans than they could afford in hopes of reaping windfall profits as home values soared.


Some members of Congress have made clear to the administration that the plan needs to exclude real estate speculators.

“We strongly support steps by lenders to help those Americans facing foreclosure to restructure their loans and keep their homes,” four House members -- two Democrats and two Republicans -- wrote in a letter to John G. Stumpf, chief executive of Wells Fargo & Co.

“However,” they were quick to add, “it should be noted that our call for assistance does not include those involved in fraudulent behavior, illegal immigrants, or so-called ‘flippers,’ who own investment properties that are not primary residences.”

The letter was signed by Reps. Paul E. Kanjorski (D-Pa.), Judy Biggert (R-Ill.), Carolyn B. Maloney (D-N.Y.) and Deborah Pryce (R-Ohio), all of whom hold senior positions on the House Financial Services Committee.

On the other side, consumer advocates contend that many borrowers are victims of overzealous mortgage loan brokers who pushed people into taking out new loans or refinancing to earn rich commissions. Last year, the parent company of Orange-based Ameriquest Mortgage Co. agreed to pay $325 million to settle state regulators’ claims that it had engaged in predatory lending practices.

Mortgage loan data also show that many people who could have qualified for low-cost prime loans instead took out higher cost sub-prime loans designed for people with shaky credit. Consumer activists say that is a sign of unscrupulous brokers, who earn bigger commissions on sub-prime loans.

“The industry should not continue to be unjustly enriched by profits they derived by putting people into higher interest, adjustable sub-prime loans when the same borrowers had actually qualified for lower interest, fixed rate loans,” California Assemblyman Ted Lieu (D-Torrance), said in a statement Wednesday.

Lieu called on President Bush to expand his proposal to freeze rates for all sub-prime borrowers who could have qualified for prime loans. “Unfortunately, for many of them, the Bush plan will do nothing to help.”

Administration officials say that they understand such complaints but that their top priority is protecting the larger economy, which could be dragged into recession if the crisis in the housing sector intensifies.

As many as 2 million adjustable-rate sub-prime mortgages will reset to higher interest rates and payment levels in the next year. If borrowers can’t make those higher payments, the properties could slip into foreclosure and further weaken home values, and the economy with it.

“The housing market downturn is the biggest challenge to our economy,” Treasury Secretary Henry M. Paulson Jr. said in a speech Monday in Washington. “When home foreclosures spike, the damage is not limited only to those who lose their homes. Homes in foreclosure can pose costs for whole neighborhoods, as crime goes up and property values decline. Avoiding preventable foreclosures, then, is in the interest of all homeowners.”

Paulson has spent the last several weeks twisting the arms of investors, lenders and mortgage servicers to get them to ramp up their efforts to confront the crisis.

The plan that came out of those efforts is voluntary and in many ways would not ask mortgage lenders or servicers to do anything they would not ordinarily do when confronted with a borrower who could not meet higher payments.

Such borrowers often go through “workouts,” in which they are given more time to make payments or secure more favorable terms. But as many borrowers learned this year, lenders have struggled to handle the increased volume of workouts.

Government officials said they needed to find ways to boost the financial system’s capacity to process the loans in the coming years to avoid foreclosures. One way would be to streamline the process by agreeing with lenders and servicers in advance on how they would process borrowers who met certain criteria.

The five-year freeze is designed mainly to help borrowers who took out adjustable-rate mortgages since Jan. 1, 2005, and face rate hikes over the next few years.

The freeze’s requirement that owners occupy their homes is designed to weed out speculators who bought properties as investments with the expectation that they could “flip” them, selling at a higher price as the market rose, officials say.

It is unclear how many sub-prime borrowers would qualify for a freeze under the plan, and Paulson warned this week that some homeowners should expect to “become renters again.”

The administration’s plan, he said, would benefit borrowers “with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate.”

The length of the proposed rate freeze has also been controversial. Lenders wanted to keep it as short as possible, but housing regulators argued that the term needed to be seven years or more -- long enough to keep borrowers in their homes until the housing market recovered.

At last week’s private meeting with mortgage industry leaders, the duration of a freeze was a key area of discussion, according to a person with knowledge of the talks.

At the meeting, Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corp., argued for a permanent freeze for borrowers who had stayed current in their loans but could not afford to pay upcoming resets. John M. Reich, director of the Office of Thrift Supervision, proposed a three-year freeze.

In a bid to reach agreement, Paulson proposed a five-year freeze as a compromise. Not everyone appears happy with that.

“We don’t think five years is enough,” said Kathleen Day, a spokeswoman for the Center for Responsible Lending.

Another unresolved issue is how the plan treats large institutional investors who now own many of the problem mortgages as part of securities offerings. Critics of the administration’s approach have said it would erode the credibility of U.S. investments with foreign investors who bought these securities.

Some analysts also warned that the proposal could backfire by causing credit to dry up, especially to low-income borrowers.

“Changes that force lenders to accept modifications to mortgages that they don’t want to accept carry a large risk of reducing the future supply of credit,” said Doug Elmendorf, a senior fellow at the Brookings Institution in Washington and a former Federal Reserve economist.

He said that the only way rescue strategies such as those being proposed would work was if what lenders lost by going along with the plan was less than what they would lose by pushing the mortgage into foreclosure.

Moreover, some worry whether investors will go to court to challenge changes that affect the terms of their deals.

Sen. Charles E. Schumer (D-N.Y.) called the administration move “a good first step,” but asked: “Will investors who might balk at going along with this be able to maintain legal roadblocks and prevent the plan from going into effect?”

Howard Glaser, a mortgage industry analyst and former U.S. housing official, recently said that the administration faced a challenge in persuading investors to go along with the plan.

“It will take a lot of skill for Paulson to pull this off in the investor community,” he said. “Really, there is no deal until you have the investor community.”


Times staff writer Peter Gosselin contributed to this report.