WASHINGTON - The Bush administration unveiled a plan yesterday 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, called 2/28s or 3/27s, that had low starter rates for two or three years 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 borrowers would not.
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 cannot pay their low starter rates, so they will not 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 said they believed that about 600,000 of them might 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 M. Paulson Jr., 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 is another motivation for lenders to push an anti-foreclosure plan. The House 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 cannot 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 & Co., a national bank, said that reworking the primary loan "puts the second [lien] holder in a better position" because foreclosure has been avoided.
There is much the Bush plan will not do.
It will not 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 25 percent of subprime adjustable-rate loans, and thus they stand to benefit from a plan that seeks to stave off foreclosures.
The plan also will not 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 yesterday 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.
It is not clear how the Bush plan will be measured. Lenders did not commit to a public-disclosure process, saying that they would communicate progress to investors and that normal loan-reporting data would indicate the number of modifications or refinancings of subprime ARMs.
Steps announced yesterday by President Bush.
A new program allowing the FHA to help homeowners refinance their mortgages.
Freeze rates on some existing subprime ARMs, preventing increases for five years.
Enable homeowners to obtain new mortgages from private sources or FHA Secure.
Now available to homeowners, at 1-888-995-4673.
Stronger lending standards:
To be announced this month by the Federal Reserve.
Federal regulators will improve requirements for lenders to help borrowers receive complete, understandable information about their mortgages.