Paulson Outlines Mortgage Aid Plan
Tuesday, December 4, 2007
Treasury Secretary Henry M. Paulson Jr. unveiled new details of the Bush administration's mortgage-relief plan yesterday, including a proposal that would grant new powers to local governments to refinance the mortgages of struggling homeowners.
Paulson spoke publicly for the first time on the strategy that would temporarily freeze interest rates for many troubled homeowners or help them refinance, a plan that is gaining momentum among federal regulators, leaders of the mortgage and housing industries, and lawmakers of both parties as the mortgage crisis worsens.
Over the weekend Sen. Hillary Rodham Clinton (D-N.Y.) expressed support for freezing interest rates for financially strapped homeowners who have adjustable-rate loans and otherwise would face higher rates. And several key Democrats and administration officials are in agreement that a major regulatory overhaul of mortgage-backers Fannie Mae and Freddie Mac is needed to help them act as a buffer from the mortgage mess.
The impact of the mortgage crisis is widening. In Florida yesterday, state officials struggled to cope with investment losses stemming from an investment pool that holds subprime loans.
Paulson urged Congress to expand the role of local governments in helping homeowners. "Given the local nature of housing markets, state and local solutions can be particularly effective," he said.
Municipal housing authorities now offer mortgages at lower-than-average rates to credit-worthy, first-time buyers whose earnings are at or below the average household income levels, which vary by region. Cities and states can provide such advantageous loans because they sell tax-exempt bonds backing the mortgages to investors at lower rates, passing on the savings to homeowners.
The Treasury Department wants to expand the authorities' reach to include subprime-mortgage holders who want to refinance with a fixed-rate loan rather than an adjustable-rate loan.
While Paulson outlined the mortgage-relief plan only in broad terms yesterday, sources close to the discussions said major components are likely to be released later this week.
The lack of details has made it hard to know how many homeowners the plan would help. In the past two years, about 2 million credit-challenged, or subprime borrowers bought houses with mortgages that typically had interest rates of 7 to 8 percent. The rates on those adjustable loans are set to jump to as high as 11 percent by the end of next year. While some owners have refinanced, others have fallen into foreclosure. Government agencies say that as many as 1.2 million homeowners still need help, though independent research groups say the number is lower.
Either way, more assistance will be needed to overcome the mortgage crisis than just the administration's plan, which focuses largely on subprime borrowers, industry executives said yesterday. And it is not just subprime mortgage holders who could lose their homes, they said. People with home- equity loans and some holders of "prime" mortgages, those given to borrowers with good credit, have begun defaulting, Washington Mutual chief executive Kerry K. Killinger said.
Paulson acknowledged the administration's plan "is not a silver bullet."
"There is no single solution to address all of the issues currently affecting the housing and mortgage markets," he said. "Treasury is aggressively pursuing a comprehensive plan to help as many able homeowners as possible keep their homes."