Experts: Home loan rescue not a solution for all
AP Business Writer
WASHINGTON – If lenders temporarily freeze low introductory interest rates on home loans made to risky borrowers before they soar, it would be a modest fix for the country’s fractured housing market.
The problems are so far-reaching, analysts say, that an emerging Bush administration-backed plan – nicknamed “teaser-freezer” by one economist – won’t spare many borrowers, or bankers, from the pain of escalating foreclosures and defaults.
Edward Yardeni, an economist who runs Yardeni Research in Great Neck, N.Y., called the plan “better than doing nothing,” but added that it is “not necessarily going to make a big dent in the foreclosure problem that’s facing us” because thousands of borrowers still might not be able to make their monthly payments.
As a result, the plan, which could be announced as soon as this week, is unlikely to quell worries that the housing market’s ongoing problems will drag the economy into a recession.
Treasury Secretary Henry Paulson has been hashing out the plan’s details with other top regulators, loan servicing companies and banks, including JPMorgan Chase & Co. and Wells Fargo & Co.
Some indications of the outlines of the proposal may come Monday morning, when Paulson is scheduled to speak at a housing forum in Washington.
As it stands, loan servicers are being asked – but not mandated – to give extensions of two to five years for subprime mortgages made to borrowers with weak credit that are due to reset at higher rates in the coming years.
The freezes would apply only for borrowers who are current on mortgage payments but unable to afford loans when they adjust to higher interest rates – and sometimes dramatically higher monthly payments. The Federal Deposit Insurance Corp. estimates that 1.1 million borrowers are in that situation.
But for an estimated 400,000 borrowers already late on payments before loans reset at higher rates, “there may be no alternative except for foreclosure,” Michael Krimminger, an FDIC special policy adviser, said last week at a congressional hearing.
Nevertheless, Krimminger said, borrowers who are current on their loan payments after two years are likely to be able to repay at that rate over the long run.