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No silver bullet for borrowers

The Bush loan plan helps only a subset of struggling homeowners.

December 07, 2007|Maura Reynolds and Jonathan Peterson | Times Staff Writers

WASHINGTON — 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.

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