Mortgage aid deal could help one million: White House official

WASHINGTON (AFP) - A mortgage relief packaged hammered out by the US administration and major lenders could help more than one million homeowners avert foreclosure in the next two years, a White House official said Thursday.

A senior White House official said the plan, to be formally announced later in the day, would involve refinancings or freezing of interest rates or payment levels for borrowers with subprime loans, made to borrowers with poor credit records.

"No one wins when a house is foreclosed on," the official said on condition of anonymity. "The homeowner loses; the lenders lose; communities and neighborhoods lose; investors lose; and the economy suffers."

The plan devised by US Treasury officials with major lenders and investors would help struggling homeowners refinance adjustable-rate loans to avoid a higher payment or freeze the current interest rates "for some time," the official said.

Some reports said rates could be frozen for up to five years.

"This private sector agreement could help more than a million qualified homeowners with subprime loans to avoid foreclosure over the next couple of years," the White House official added.

The plan was set to be announced amid growing concerns that the slump in housing and rising home loan defaults could tip the US economy into a downturn.

Various estimates indicate two million or more homeowners are at risk of default because of a hike in interest rates that would mean higher payments on adjustable-rate mortgages or other subprime loans that offered low initial rates.

The White House official said the plan was agreed upon by the Hope Now Alliance, a group that includes mortgage lenders and services as well as investors holding mortgage-backed securities.

The plan apparently would not be binding but could be widely implemented because it has the support of major lenders and investors.

The official said the plan is aimed at "qualified homeowners" who live in their homes but are unable to make the higher payments on their subprime loans once the interest rates reset, but can at least afford the existing payments.

The official said the plan includes "a set of industrywide standards" to provide relief to these borrowers.

Democratic New York Senator Hillary Clinton said earlier that the administration appears to be seeking an interest-rate freeze for "a very narrow group of borrowers."

"That is unfortunate because this crisis demands a more comprehensive approach that is adequate for the scale of the problem," the Democratic presidential candidate said.

Clinton has proposed a 90-day moratorium on all foreclosures on subprime, owner-occupied homes, an interest-rate freeze on all subprime adjustable mortgages for at least five years, and reports from lenders on their success rate in modifying loans.

Andrew Busch, analyst at BMO Capital Markets, said both the Bush and Clinton plans "have problems with who would qualify and the potential for people to change their payment behaviors (stop paying) to meet the guidelines."

"Neither plan solves the problems, but the rate freeze makes more sense as it'll keep people paying while they work out their issues," he added.

Joel Naroff at Naroff Economic Advisors said the Bush plan is "more political than economic" and could have a variety of unintended consequences that could affect banks and financial markets and ultimately harm the economy.

"If they freeze rates, it means that instead of writing off the loans, the banks are still carrying these loans that are questionable."

Naroff added that the freeze could mean mortgage-backed securities and other assets might be hurt, affecting financial markets.

"If there are freezes, it changes the structure of that entire market and could create problems with that market," he said. "There may be some short-term gains but longer-term problems that are unclear."

Federal Reserve Board Governor Randall Kroszner told Congress meanwhile that investors will get better returns from a systematic program to modify mortgages than allowing massive numbers of foreclosures.

Such efforts to avoid foreclosure "not only help homeowners, they are usually cost-effective for investors," he said in testimony to the House of Representatives Financial Services Committee.

Article By: Yahoo News