Bush Announces Limited Subprime Interest Rate Freeze

by Amy Lillard

 

After negotiations between federal regulators and U.S. lenders, the Bush Administration announced today a five-year interest rate freeze on subprime mortgages for certain borrowers at risk for foreclosure.

The move, announced by President Bush and Treasury Secretary Henry Paulson, is designed to stem the rising numbers of foreclosures, and protect the borrowers whose adjustable-rate mortgages (ARMs) will reset to painful levels over the next year. The White House said the plan could help 1.2 million homeowners.

With this plan, borrowers of adjustable-rate mortgages whose interest rates will reset in 2008, and who are current with their monthly payments, will have a five-year interest rate freeze.

The freeze is limited, however. Anyone who is judged capable of making mortgage payments as they reset is exempt. Also, anyone more than 30 days late, or borrowers who have been more than 60 days late in the previous 12 months, will be excluded.

According to the New York Times, the investment bank Barclays Capital estimates only 240,000 borrowers will be covered by the freeze, out of the 2 million subprime ARMs expected to reset in 2008 or 2009.

In addition to the rate freeze, the plan will work to speed up other forms of help. The goal is to streamline the refinancing/mortgage modification process, allowing borrowers to move into a new mortgage or a Federal Housing Administration (FHA)-backed loan. Lenders will work quicker to examine loan criteria, credit scores, and payment history to make a determination on next steps.

The plan comes about as the housing situation grows grimmer. According to Credit Suisse Group, more than 30 percent of borrowers with subprime adjustable-rate mortgages are behind on their payments, and face their loans resetting higher. An estimated 775,000 homes with $143 billion of mortgage debt will go into foreclosure over the next two years.

This housing slump is affecting the greater economy, and this new plan and other recent legislation to reform mortgage management are attempts to end the drain on economic growth.

The president, during his announcement about the subprime plan, also urged Congress to act quickly on pending mortgage relief legislation, which has been stuck in the Senate for some time. The legislation includes the FHA Modernization bill and other bills enhancing the mortgage refinancing process.