Many Will Still Face Foreclosure

The Record ( — Friday, December 7, 2007


The plan announced Thursday by the Bush administration to freeze interest rates on some subprime mortgages will help many troubled borrowers, but leave others in the cold, several North Jersey observers said Thursday.

Under the plan, which was negotiated with the mortgage industry, certain homeowners with subprime, adjustable-rate mortgages who have made all their payments on time will be able to avoid sharply rising monthly payments. Others would get assistance in refinancing with their lenders and moving into loans secured by the Federal Housing Administration, President Bush said.

Bush called the plan "a sensible response to a serious challenge."

The administration is trying to prevent a 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 as high as 11 percent.

The plan was announced on the same day the Mortgage Bankers Association said that mortgage delinquency rates are continuing to climb. (See story, B-1) In New Jersey, about 4.9 percent of borrowers are delinquent on their mortgage payments, compared with 5.8 percent nationwide.

Sen. Bob Menendez, a Hudson County Democrat, said the president's plan "simply does not seem to go far enough."

"I am concerned that President Bush's plan will only help a fraction of the families at risk," Menendez said in a Senate speech Thursday.

The White House estimates the plan could benefit 1.2 million homeowners, but experts said only a fraction would be eligible for the rate freeze.

"It's a small step in the right direction," said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies. The plan may help about 15 percent to 20 percent of subprime borrowers, he estimated. "It is an important Band-Aid, but the arm is hemorrhaging."

Keith Gumbinger, vice president of Pompton Plains-based HSH Associates, which tracks the mortgage market, noted that borrowers who have fallen behind on their mortgages will not be included.

"It's hard to call it fair and equitable. It may help some borrowers remain in their homes longer than they might have otherwise," Gumbinger said.

He also predicted that investors who invested in these mortgages will not be happy about accepting lower returns. "Let the lawsuits begin," Gumbinger said.

Treasury Secretary Henry Paulson insisted, however, that investors for the most part accept the need to work with distressed borrowers, which will reduce the potential for lawsuits. In his remarks in Washington, the treasury secretary said investors realize that modifying these loans will be less expensive than forcing the homeowners into foreclosure.

The impact of the subprime crisis has spread far beyond individual homeowners and into global credit markets. As investors began to mistrust the soundness of mortgage-backed securities earlier this year, their values plummeted. Several Wall Street CEOs, including the heads of both Merrill Lynch and Citigroup, lost their jobs in the resulting upheaval while the stock market has whipsawed.

Closer to home, rising foreclosures hurt the value of nearby houses, further depressing a slow housing market.

Counselors who work with low- and moderate-income borrowers say they have seen a big jump in the number of struggling homeowners.

At New Jersey Citizen Action, the number of homeowners seeking crisis counseling has jumped 40 percent this year, according to Phyllis Salowe-Kaye, executive director. She said the Bush plan won't help enough people in danger of losing their homes.

For many of these people, a five-year freeze will not address the underlying issue, she said.

"It's postponing the problem for five years for people who never should have gotten loans in the beginning," she said.

Sylvine Marabotto, director of the Consumer Credit Counseling Service of New Jersey in Cedar Knolls, said many of her agency's clients have faced much higher monthly payments after their adjustable mortgages ratcheted upward. It's causing "havoc" in their budgets, Marabotto said.

"We're seeing people who are close to foreclosure," she said. "We're seeing folks who just can't afford to make their payments anymore."

She said the homebuyers bear some of the blame, for a "buy now, worry later" approach to getting a home. But she said many lenders are to blame, too. "There were loans being made to people who clearly were not able to afford houses. There was some predatory lending going on."

The president's plan covers only owner-occupied properties, a provision aimed at excluding investors and speculators who incorrectly bet that house prices would continue to rise.

Rep. Scott Garrett, R-Wantage, a member of the House Financial Services Committee, said the White House plan was a step in the right direction "as long as it's a voluntary, cooperative effort by the industry."

Garrett opposes any kind of bailout for homeowners left with mortgages they cannot afford. On Bloomberg television, he said the government should get involved only in situations where lenders engaged in fraud.

Bush plan highlights

Staff Writer Herb Jackson contributed to this article, which includes material from news service reports.

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