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Subprime Bailout Plan Opens to Mixed Reviews
By Alton Gary Simpson
In the wake of the subprime mortgage market meltdown and the subsequent credit crunch, the Bush administration plan to limit foreclosures by working with mortgage lenders and firms to freeze interest rates for five years on certain subprime mortgage loans has opened to mixed reviews. While the plan has been lauded for being "a positive first step," as noted in a statement from the Center for Responsible Lending, it has received a lot of criticism because it doesn't deal with the root causes of the foreclosure crisis or reach enough distressed borrowers. The administration's plan has also received criticism for being a reward for reckless and irresponsible behavior on the part of investors, lenders and borrowers.
The proposal made by the Treasury Department last week would freeze the interest rates on select subprime ARMs at their starter rate for five years. Only owner-occupant households are eligible and need to meet a number of criteria such as being on time with their mortgage loan payments and their FICO score must be between 575 and 660. Furthermore, the modification must be for a first-lien mortgage that was initiated between Jan. 1, 2005 and July 31, 2007, and scheduled to reset between Jan. 1, 2008 and July 31, 2010. Also, participation in the program is voluntary by lenders and servicers.
According to an estimate by CRL, only 7% of subprime borrowers will be helped by this initiative. The number of homeowners in danger of foreclosure is estimated to climb as high as two million. The consumer advocacy group also noted that the plan does not remove the financial and legal incentives for servicers to foreclose on loans rather than modify them, especially since it relies on voluntary decisions by individual mortgage servicers.
"Recent experience shows that the likelihood of widespread modifications is small under this 'business as usual' approach," said a statement from CRL. The statement cited a study by Moody's Investors Services that found only 1% of resetting loans had been modified through July 2007, despite claims from major lenders and servicers that they were committed to modifying loan terms to help borrowers avoid foreclosure.
Greg Marcus, managing director of Somerset Mortgage Bankers based in Melville, N.Y., stated that thousands of mortgage borrowers have been overlooked by the relief plan. He noted that the plan does nothing for those who have refinanced during the past two years, adding that the Treasury plan should include all borrowers who refinanced their rates during the housing boom. "What about those who bought their home before 2005, but refinanced in the past two years," asked Mr. Marcus? "Why are they not eligible for the Bush plan? They are not speculators. They still live in the same house. This makes no sense."
On the other hand, the Shadow Financial Regulatory Committee of the American Enterprise Institute believes that the Bush administration's plan goes too far in the direction of government interference in the marketplace. "To the extent that the mitigation program can be viewed as a 'bailout' of selected borrowers, it reinforces incentives for subprime borrowers to engage in moral hazard," said a statement released by the group. In other words, the Treasury initiative rewards irresponsible behavior. A poll conducted on behalf of the National Taxpayers Union taken before the administration unveiled its plan found that Americans are skeptical about proposals to bail out the subprime mortgage market.
"When it comes to rescuing the subprime mortgage market, Americans are skeptical not only of who will benefit, but who will be left holding the bag," said Pete Sapp, vice president for policy and communications, NTU. "While other surveys have shown serious public concerns over rising mortgage defaults, this poll demonstrates Americans have equally serious reservations over government involvement in the situation." He also noted that the administration's plan could quickly grow out of its control, especially with upcoming presidential and congressional elections.
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