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Home Mortgage Loan Interest Rate Freeze
A plan to freeze subprime mortgage loan interest rates for five years is intended to ease the threat to the economy from the cascading number of foreclosures among subprime borrowers. The Treasury Department estimates that the plan could grant financial relief to hundreds of thousands of homeowners.
U.S. officials have been negotiating the voluntary deal with lenders, mortgage servicing firms and other companies. The sources who disclosed details of the plan were not authorized to speak on the record before the official announcement.
Treasury Secretary Henry Paulson has insisted that taxpayer money will not be used in the deal. Rather, investors who bought mortgage-backed securities that included subprime bad credit loans, expecting a high return, will bear the brunt.
The plan covers only subprime adjustable-rate mortgage loans issued from January 2005 to mid-2007 that will reset to higher rates starting next year through mid-2010. To qualify, borrowers must live in their home but be unable to afford their payments once they rise. They must also have less than 3% equity in the home, according to the Mortgage Bankers Association, which took part in the negotiations.
Nearly 17% of subprime borrowers were at least one payment behind in the first quarter of this year, and few, if any of them, will qualify for the plan.
The plan emerged from talks between Paulson and other banking regulators and banks, mortgage investors and consumer groups trying to address an avalanche of feared foreclosures as an estimated 2 million subprime mortgages reset from lower introductory "teaser" rates to higher rates.
In many cases, the higher rates will boost monthly payments by as much as 30%, making it very difficult for many people to keep current with their mortgage loans. The plan is aimed at homeowners who are making payments on time at lower introductory mortgage rates but cannot afford a higher adjusted rate.
The restrictions, especially the lack of aid for homeowners who recently lost homes or who are now in foreclosure, drew criticism from some consumer advocates. The planned freeze on interest rates on various subprime loans doesn't help the vast majority of those hurt by the crisis, says Maude Hurd, president of the Association of Community Organizations for Reform Now, which represents low- and moderate-income families.
Paulson's proposal also received a mixed reception from some lawmakers, who are concerned that the government is getting too deeply involved in the marketplace, or that bondholders will oppose the deal.
"The $64,000 question," said Sen. Charles Schumer, D-N.Y., is "will investors who might balk at this be able to maintain legal roadblocks and prevent the plan from going into effect?"
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Lenders Freeze Loan Rates
The Bush administration reached an agreement with the mortgage industry on Wednesday on a plan to freeze interest rates for up to five years for a portion of the two million homeowners who bought houses in the last few years with subprime loans.
The plan, hammered out after weeks of talks among Treasury Department officials, mortgage lenders and Wall Street firms, would allow distressed borrowers who are current on their payments to keep their low introductory rates and escape an increase of 30 percent or more in their monthly payments when the rates expire.
Democratic lawmakers and presidential contenders quickly criticized the plan as being too timid and promoted more ambitious proposals of their own.
The agreement, to be formally announced Thursday by President Bush, is expected to contain numerous limitations that would exclude many - if not most - subprime borrowers, according to industry executives who have seen it. It would exclude those who are delinquent on their payments - about 22 percent of all subprime borrowers, according to First American LoanPerformance, an industry research firm.
The plan is also expected to exclude any borrower whose introductory rate expires before Jan. 1. About $57 billion in subprime loans are scheduled to be reset at higher rates in the final three months of this year, according to estimates by First American LoanPerformance.
Mortgage companies could also exclude borrowers who they conclude are making enough money to afford higher monthly payments. Barclays Capital - extrapolating from a similar program recently unveiled in California - estimates that only about 12 percent of all subprime borrowers, or 240,000 homeowners, would get relief.
"From what I’ve heard, I don’t see anything that leads me to believe we will see an increase in loan modifications," said Eric Halperin, Washington director of the Center for Responsible Lending, a nonprofit group that has studied the subprime problem.
The plan is being announced as fallout from the mortgage crisis is seeping into the political sphere. Until recently, few candidates talked about subprime loans, and few bankers and traders on Wall Street paid much attention to mortgage-crisis declarations on the campaign trail. But with the meltdown growing worse, housing prices still plunging and many economists worrying about a recession, President Bush and his Democratic opponents are now racing to come up with answers.
Democratic presidential candidates complained that the White House plan was overly narrow.
"It seems that President Bush is going to give struggling homeowners far less than they need," Senator Hillary Rodham Clinton of New York said in a statement on Monday. "With news accounts using terms like ‘whittled down’ and ‘limited’ to describe the scope of the Bush plan, it appears that the president is pushing a freeze for a very narrow group of borrowers."
Mrs. Clinton visited the Nasdaq stock market in New York on Wednesday and assailed Wall Street firms for the mortgage mess. She called for a 90-day moratorium on subprime foreclosures and a rate freeze that would apply to all borrowers current on payments and some who have fallen behind.
Despite the criticism, the Bush plan is a significant change in an initial reluctance to impose solutions. As recently as a month ago, Treasury Secretary Henry M. Paulson Jr. argued that lenders should try to work out new terms on a case-by-case basis.
But Mr. Paulson and federal banking regulators became increasingly impatient with the industry’s failure to produce a systematic, rapid approach to evaluating borrowers.
Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, proposed a comparatively radical plan to permanently freeze rates on all subprime loans. Mr. Paulson rejected that idea, but began to push for a standardized approach that would temporarily freeze rates for many borrowers facing upward adjustments on their monthly payments.
Administration officials emphasized that the rate freeze was only one part of a broader plan. Mr. Bush will also ask Congress to temporarily expand the authority of states and localities to issue tax-exempt mortgage-revenue bonds to help people refinance their mortgages.
Treasury officials are also pushing the industry to come up with a streamlined way to help subprime borrowers refinance with a more conventional, lower-rate mortgage.
Subprime loans typically come with high interest rates, and were originally intended for people with poor credit histories. But some analysts say that more than a third of all subprime borrowers could have qualified for cheaper conventional loans at the outset.
But there was no sign on Wednesday that Mr. Bush’s plan would contain new commitments by lenders to help people refinance. Absent any new approaches, borrowers would still be largely on their own to find better deals.
Republican presidential candidates have seemed reluctant to propose government rescue plans, seeing them as a bailout. But they are feeling the heat nonetheless, and some are joining Mr. Paulson’s effort to help people in danger of losing their homes.
"You don’t want to reward speculators," said Senator John McCain of Arizona, who is running for the Republican nomination. "You’d like to take each individual case on its own, but there’s no time to do that. What’s important is to stop the bleeding."
John Edwards, the Democratic presidential candidate and former senator from North Carolina, on Wednesday proposed a seven-year freeze in subprime interest rates, as well as a new fund to help distressed borrowers. Mr. Edwards also called for a change in bankruptcy laws that would give homeowners far more bargaining power in negotiating new terms.
Senator Barack Obama of Illinois jumped ahead of many of his Democratic presidential rivals in September with detailed recommendations that included a government rescue fund, changes in bankruptcy law and a new tax credit on mortgage interest for people who do not itemize their taxes and cannot currently deduct their interest payments.
Adding to the political pressure, many of the states that are hardest hit by mortgage defaults and falling home prices are important election swing states. They include Florida, Michigan, Ohio and Pennsylvania.
The first two voting states, Iowa and New Hampshire, have not been particularly hard hit by the housing crisis, but two of the states with early nominating contests - Florida and Nevada - have among the worst problems in the country.
"Even though foreign policy has been dominating the election for the past year, economics will pay a bigger role next year," said Howard Glaser, a mortgage industry consultant who worked in the Clinton administration and is an adviser to Mrs. Clinton’s campaign. "Not only will the specific mortgage and housing problems intensify, the ripple effects on the economy will also magnify."
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Mortgage Loan Payment Help
On a day when the Mortgage Bankers Association reported that home foreclosures hit an all time high, President Bush is scheduled to announce a plan to freeze interest rates for five years for thousands of strapped homeowners whose mortgages were scheduled to rise in the coming months.
The proposal was developed in negotiations led by Treasury Secretary Henry Paulson with the mortgage industry. It would freeze introductory "teaser" rates on subprime mortgages, preventing them from resetting to higher rates for five years.
White House deputy press secretary Tony Fratto said it would help "potentially a little more than a million" people who can afford payments with their introductory rates, but not if they jump to higher rates.
Fratto said it was voluntary, and did not represent federal intrusion into the private market. Those comments were aimed at countering criticism from conservatives that the administration was violating its free-market principles by pursuing a government solution to the mortgage crisis.
President Bush, who was to announce the agreement after a meeting with industry leaders at the White House on Thursday, has stressed that the deal is not a bailout because no government money is involved.
Release of the plan was coming after news earlier Thursday that home foreclosures surged to an all-time high in the July-September period. The Mortgage Bankers Association reported that the percentage of all mortgages that started the foreclosure process in the third quarter jumped to a record 0.78 percent, surpassing the previous record of 0.65 percent of all mortgages in the second quarter.
The administration's effort is aimed at stemming a further tidal wave of foreclosures in coming years as 2 million subprime mortgages - loans provided to borrowers with spotty credit histories - reset from their introductory rates of around 7 percent to 8 percent to levels as high as 11 percent, adding hundreds of dollars to the typical monthly payment.
The mortgage companies will offer to freeze the loans at the lower introductory rates as long as the borrowers did not miss any payments at the lower rate.
The program is the biggest effort yet to deal with the surge in mortgage defaults, which have piled up billions of dollars in losses for big banks, hedge funds and other investors while roiling financial markets worldwide. The defaults are the latest economic blow from the worst housing slump in more than two decades. Some economists think the housing bust may become severe enough to push the country into recession.
Two Democratic presidential contenders, Hillary Rodham Clinton and John Edwards, complained Wednesday that, given the high risk to the economy, Bush's proposal did not go far enough. They proposed their own plans that would not only freeze mortgage payment rates but also declare moratoriums on further foreclosures to pressure lenders to reach at-risk homeowners.
The financial services industry applauded the administration for negotiating a plan that will allow free-market forces to operate. The hope is that the five-year freeze will buy time for the housing industry to work down record levels of unsold homes and for sales and prices to start rising again.
A housing rebound would enable homeowners to refinance their current adjustable rate mortgages into fixed-rate loans with more affordable monthly payments.
The big sticking point in the lengthy negotiations was getting investors who have purchased the mortgages after they were bundled into mortgage-backed securities to agree to accept lower interest payments. Critics have said even with a deal, there are likely to be lawsuits.
"The $64,000 question remains: `Will investors who might balk at going along with this be able to maintain legal roadblocks and prevent the plan from going into effect?'" asked Sen. Charles Schumer, D-N.Y.
But officials representing major players in the mortgage industry said they believed the plan would withstand any legal challenges and would help at-risk homeowners avoid defaulting on their mortgages.
Steve Bartlett, president of the Financial Services Round-table, a trade group representing the country's largest financial service firms, said the deal would benefit banks, investors and homeowners since there is a significant cost when a mortgage is foreclosed.
Under the administration plan, the rate freeze will apply to loans made at the start of 2005 through July 30 of this year and will cover loans that had been scheduled to rise to higher rates between Jan. 1, 2008, and July 31, 2010.
The plan represents an about-face for Paulson, who until recently had insisted the mortgage crisis could be handled on a case-by-case basis. However, he and other administration officials became convinced the tide of foreclosures threatened by the mortgage resets represented such a severe threat that a more sweeping approach was needed.
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Faster Payoff Extra Mortgage Payments
While some families are struggling to pay their mortgages, others are in the enviable position of considering whether to make an extra payment this year.
Experts say that while such a move can reduce interest payments over the life of the loan - and speed up the date of a mortgage burning party - it may not be the best use of consumers' money.
Although you may accomplish paying off your mortgage early, you're not doing any other saving and may enter retirement broke. Maybe it's more important for people to first focus on creating wealth than to eliminate debt.
There are benefits, of course, to speeding up the payment of a mortgage by adding extra money to each month's payment check, shifting to biweekly payments or making a 13th "monthly" payment before year's end.
Take the case of a family that takes out a $200,000 home loan with a fixed rate of 6 percent for 30 years. If that family makes an extra payment each year earmarked to reduce principal, it will save more than $47,000 in interest over the life of the loan and pay it off in less than 25 years.
Still, speeding up the payment of a mortgage may not be as beneficial as dealing with other debt. Debts such as credit cards often carry considerably higher interest rates than mortgages, and interest payments on such consumer loans are not tax deductible like mortgage interest is.
Should a homeowner never consider diverting more money to a mortgage until all other savings accounts are funded?
Tying up more money in an illiquid asset such as a home is ill-advised if the homeowner doesn't have an adequate emergency savings cushion. A much better use of the money would be to contribute to a 401(k) retirement account to maximize the employer match, or fund a Roth IRA that permits tax-free withdrawals in retirement.
Homeowners need to ask themselves what the very best use of a spare dollar could be.
Look at your mortgage interest rate, say 6 percent. Then look at your possible tax deduction. If you're in a 28 percent tax bracket, your after-tax cost of borrowing is about 4.5 percent.
The question is, from a purely financial standpoint, 'Can I do better than 4.5 percent after-tax somewhere else?' The answer is generally 'yes.'
Considering an extra mortgage payment? Review this checklist:
Do you have any debt that has an interest rate higher than the rate on your mortgage? If yes, you should be putting your extra dollars against that debt first.
If you have no debt, are there investments that are likely to give you a better after-tax return than your mortgage?
Do you have enough liquidity in your life? If you don't have enough money squirreled away to cover at least six months of living expenses, create that "emergency fund" first.
People need to worry about being "house poor," meaning they have all their money tied up in their home.
If you don't have a nickel in savings but you're paying extra against your mortgage, you should worry.
Yet there are times when those extra mortgage payments should be considered.
Prepaying a mortgage can be a very good decision for someone with a low mortgage balance and approaching retirement. In this situation, there is little if any tax benefit - but the ability to eliminate a large monthly obligation in retirement is very appealing.
Others who might consider extra payments are those who find it impossible to save. But, beware of accelerated payment programs sponsored by mortgage lenders, which often add fees; you might be able to make extra payments on your own without penalty.
Some kind of biweekly payment program - assuming there's no fee for it - might be the only way you can possibly save. It's maybe not the best economic solution, but it beats going out and spending the money on more shoes.
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