A Buffer? Or a Bailout?
To Some Lawmakers, Bush's Mortgage Relief Is Too Weak a Patch to Protect Against a Growing Storm. Others Say It's Too Much.

By David Cho and Neil Irwin
Washington Post Staff Writers
Friday, December 7, 2007

Several hundred thousand homeowners will qualify for a freeze in home loan rates under the Bush administration's mortgage-relief agreement announced yesterday, a figure that intensified debate over whether the government is helping too many or too few people at risk of losing their homes.

As fresh data yesterday showed record foreclosures among all types of mortgages, lawmakers on both sides of the aisle worried the plan would bail out people who made bad financial decisions, while Senate Democrats attacked it for not helping enough homeowners.

The numbers at the crux of the criticisms are these: 600,000 holders of subprime loans would be put on track to refinance but with no guarantee they could avoid a prepayment penalty. Another group of homeowners, thought to be fewer than 600,000, would qualify for an interest-rate-freeze for five years.

Only those who took out subprime loans between 2005 and this summer, live in those homes and have credit scores less than 660 will be able to obtain a rate freeze with little hassle.

The plan, announced by President Bush at the White House, will not help another 600,000 subprime mortgage holders who are at serious risk of losing their homes by the end of 2009. Nor would it aid anyone who is in foreclosure, administration officials said.

The ranks of those who fell into foreclosure in the third quarter hit a record of 351,000, according to a Mortgage Bankers Association survey released yesterday. And 5.6 percent of all loans are behind on their mortgage payments, the highest level since 1986.

Foreclosures increased among all kinds of mortgages, though the percentage was highest among subprime adjustable-rate loans, which typically offer higher introductory interest rates to people with questionable credit histories. These mortgages made up 6.8 percent of all outstanding loans but accounted for 43 percent of those entering foreclosure. The hardest-hit states included Florida and California, where the subprime loan business boomed.

Another piece of bad news hit the debt markets yesterday when Moody's Investors Service issued an analysis that defaults on junk bonds could quadruple next year. Such reports and statistics increasingly are becoming part of a politicized debate over the role of the government in solving the mortgage mess.

Several Democratic presidential candidates blasted Bush after his news conference for doing too little too late to help homeowners. Sen. Hillary Rodham Clinton (D-N.Y.) again touted her plan to freeze the rates on all subprime loans, regardless of the holder's income, and impose a 90-day moratorium on foreclosures.

Sen. Christopher J. Dodd (D-Conn.) weighed in, too, saying "for the administration, already late in addressing this crisis, to put forth an agreement that amounts to little more than financial wallpaper is insufficient to say the least."

The political infighting over the mortgage crisis also made for strange bedfellows yesterday.

Some Democrats, who normally support a large role for the government, questioned the wisdom of bailing out one group of homeowners. At a House Financial Services Committee hearing, Chairman Barney Frank (D-Mass.) raised concerns over helping people with bad credit while doing nothing for those with good credit.

Bush, who is generally skeptical of government intervention, yesterday championed the agreement that his administration orchestrated between major mortgage companies and representatives of the many investors who bought securities tied to subprime loans. The agreement to freeze interest rates on many of those loans is voluntary and was reached after jawboning by top government officials. It requires no congressional approval or public funds, except for $170 million for credit counseling.

Frank and fellow Financial Services Committee member Rep. Judy Biggert (R-Ill.) also criticized the Senate for inaction on House-passed bills that would address the housing crisis.

"The increasing inability of the United States Senate to function is becoming a threat to governance," Frank said.

Bush joined the attack, saying the Senate has stalled key housing initiatives such as reform of the Federal Housing Administration and of government-sponsored mortgage backers Fannie Mae and Freddie Mac.

"Last year, the House passed the bill with more than 400 votes, and this year the House passed it again," Bush said. "Yet the Senate has not acted."

Sen. Charles E. Schumer (D-N.Y.) shot back, blaming the holdup on Senate Republicans.

"The President says that Congress should pass comprehensive FHA reform. Why would a Republican senator object to voting on legislation that the president deems critical?" Schumer said. "The president says that he'd like comprehensive reform of Fannie Mae and Freddie Mac. Why doesn't he jawbone Republican senators who are standing in the way of that measure?"

The mortgage mess began when defaults started soaring among homeowners with subprime loans, which jump after two or three years of an introductory rate. Most of those loans started around 7 percent and would reach 10 percent or more when they reset. A 3 percent rate leap would raise a monthly payment by 32 percent.

Treasury Secretary Henry M. Paulson Jr. warned that the administration's plan is not a "silver bullet" for the nation's deepening housing crisis. And he acknowledged that more will have to be done.

Under the plan, borrowers at risk of losing their homes must discuss their options with their mortgage servicers. These firms include giants that manage about 80 percent of affected mortgages, such as Wells Fargo and Countrywide Financial.

The servicers will attempt to determine which people who have kept up with their payments are likely to be able to refinance their mortgage, perhaps into federally insured FHA loans. That will include those with at least 3 percent equity in their homes.

Homeowners who appear unable to refinance their loans would be eligible for the fast track to freeze their interest rates for five years. To qualify, they must have a credit rating less than 660, they must occupy their home, and the reset must increase what they owe by at least 10 percent. Those with credit scores higher than 660 could still qualify but must prove that they don't make enough money to absorb a mortgage rate increase.

The plan's architects said they decided to use credit scores so loan modifications for a troubled borrower could be executed within a couple of weeks. If they relied on income, mortgage services would face a more complex and onerous process to obtain and verify information.

That could create some perverse incentives for homeowners whose mortgages are about to reset, however. For example, a person could keep paying his mortgage but stop paying other bills, driving his credit rating down -- and thus be eligible for an automatic five-year delay in his mortgage resetting higher.

"I don't think that the percentage that games the system is a significant percentage," said Michael J. Heid, co-president of Wells Fargo Home Mortgage, at a briefing for reporters at the Treasury Department yesterday.

Staff Writer Dina ElBoghdady contributed to this article.

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