A Subpar Plan to Save Subprime Borrowers

How timely that just as President Bush was announcing a deal to help homeowners struggling with their mortgage payments, new data were released showing that foreclosure starts set a new record.

In a news conference Thursday, Bush trumpeted a private-sector plan that would help some struggling subprime borrowers by freezing their current teaser interest rates for five years. Eligible homeowners would be those who got adjustable-rate subprime mortgages between Jan. 1, 2005, and July 31 of this year -- and whose rates would jump by July 31, 2010.

On the same day, the Mortgage Bankers Association released its latest National Delinquency Survey showing that the total delinquency rate had hit its highest level since 1986. The rate of foreclosure starts and the percentage of loans in the process of foreclosure are at their highest levels ever.

It is important to note that the MBA said the increase in foreclosure starts was due to troubled loans of all types, not just subprime loans, which are the kind eligible for help in the administration-backed initiative called the Hope Now alliance.

The alliance, a coalition of nonprofit groups, lenders and investors, represents servicers who cover 84 percent of outstanding subprime mortgages, according to Treasury Secretary Henry M. Paulson Jr. Under this initiative, up to 1.2 million subprime, adjustable-rate mortgage borrowers are eligible for fast-track help to avoid foreclosure.

Bush said the relief for borrowers will come in one of three ways: by refinancing an existing loan into a new private mortgage, by moving borrowers into an FHA Secure loan, or by freezing borrowers' current interest rate for five years.

Bush urged struggling homeowners to call the Hope Now hotline, which is at 888-995-HOPE. Counselors are available 24 hours a day to provide advice.

The administration is quick to point out that this isn't a bailout by the government. It's a private, voluntary effort to stem foreclosures.

Although I'm glad some homeowners are getting interest rate relief, this plan doesn't help enough people and doesn't address the systemic problems that led to this mess. The fact is, too many people are in homes they can't afford today, tomorrow or probably five years from now. The bad lending practices that prompted people to buy homes they could ill afford won't go away by helping the worst-case situations.

"While we certainly all hope this will be a shot in the arm for the housing slump, it is hardly a panacea," said Sen. Charles E. Schumer (D-N.Y.), the chairman of the Joint Economic Committee. "There are too many families who may be left out, too much left up to the voluntary willingness of the private sector, and too little disclosure and transparency to ensure families who do qualify are being helped."

Schumer pointed out that the Hope Now plan excludes borrowers who are not current on their payments, which immediately disqualifies 22 percent of subprime loan holders from receiving relief.

When asked what happens after the five-year rate freeze ends and people's interest rates significantly jump, Paulson said, "This plan is not a silver bullet."