A Subpar Plan to Save Subprime Borrowers

By Michelle Singletary
Sunday, December 9, 2007

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."

Paulson talked about the importance of preventing foreclosures now but concluded, "Under the worst conditions, you would be . . . going through a modification or a refinancing program. But we'll have five years to deal with it."

And there you have it, folks. That's been the problem all along.

We are in this predicament because homeowners were told not to worry about their ridiculously low interest rates because they could refinance later before the rates reset. Or they were delusional in thinking they could afford future rate increases if they couldn't refinance.

Don't worry. Be happy.

Well, people aren't happy now. There's not much hope for a lot of people. Declining home values are preventing homeowners from refinancing. Incomes didn't rise enough to support higher mortgage payments.

Things weren't getting any better, so what makes the administration think that in five years, home values will recover enough to bail people out? What makes it think that the same foolish people who got themselves into these loans will be better off financially in five years?

And what about prime borrowers, people with good credit who refinanced with interest-only or other exotic mortgages and created a situation in which they owe more on the house than they borrowed?

Who is going to help borrowers who are currently in crisis? I guess it's appropriate that this initiative is called Hope Now. That's because the administration and the mortgage industry are still hoping that things will get better.

But hope alone and a fix for a fraction of the folks facing foreclosure just aren't good enough.

¿ On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.She also has a new personal finance call-in show that airs Sundays on XM Satellite Radio, Channel 169 "The Power," from 8 to 10 p.m.

¿ By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

¿ By e-mail:singletarym@washpost.com.

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