By Mike Stetzer
At Total Bankruptcy, we've detailed the horrors of the current housing market, and the struggle of homeowners to keep up with payments that have jumped drastically due to adjustable rate mortgages (ARMs).
We've also covered the often questionable tactics of predatory lenders, who boost their profit margins by scoping in on homeowners with poor credit in order to make a quick buck on subprime mortgage loans.
Now, President George W. Bush has announced a plan to provide aid for the current subprime mortgage crisis, together with Treasury Secretary Henry Paulsen and Housing and Urban Development Secretary Alphonso Jackson.
The main component to Bush's plan is an agreement with the mortgage industry to freeze interest rates for the next five years. The plan will allow will allow consumers to maintain the low introductory or "teaser" rates that were offered on their subprime mortgages without experiencing the sudden raise of 30% that is expected each time the rates jump.
The Bush administration hopes that their plan will buy time for homeowners who could potentially be forced into foreclosure when their current low interest rates jump up as much as four points. In their view of the situation, homeowners who are able to take advantage of the frozen mortgage rates will later be able to refinance at better interest rates when the housing market stabilizes.
The plan instates a phone number (1-888-995-HOPE) that has counselors available to answer questions about how homeowners can participate in the plan and the interest rate freeze.
Immediately following its unveiling, however, critics began attacking the plan's weaknesses. For example, the plan only applies to homeowners who have not missed any payments, those who can currently afford their payments but will not be able to afford them once the interest rates are hiked.
This excludes those who are currently facing foreclosure, as well as those who currently cannot afford a mortgage. The plan also only applies to homeowners who live in the residence that the mortgage covers, meaning that investors who purchased properties and rent them out cannot qualify for the rate freeze.
The Bush administration boasted that as many as 1.2 million homeowners will be qualified to receive aid from the interest rate freeze, though many other estimates place the number of qualifiers at a much lower threshold. The Center for Responsible Lending claims that only 7%, or 145,000 homeowners, will be helped.
A quick refresh of the facts concerning the current mortgage and housing crisis is in order to help understand how Bush's plan offers aid to homeowners caught in this unenviable predicament.
Around 100,000 ARMs are on track to reset to a higher payment rate every month for the next two years. The collective amount of money owed from these "resets" across the board is projected to equal $330 billion over the next year.
And, as a result, the current rate and number of homeowners facing foreclosure is unprecedented. The Center for Responsible Lending estimates that subprime mortgages will result in 2.2 million foreclosures over the next several years.
All criticism that the plan has drawn centers on its limited nature, both in terms of the narrow segment of homeowners it covers and the temporary fix that it creates, both for individual homeowners and for the housing market generally.
Many vocal critics argue that the rate freeze will eventually result in higher interest rates for everyone, and the move will devalue mortgage securities to the point that an economic recession that continues into the next decade is almost certain.
One thing the plan does not do is address many of the underlying causes of the subprime crisis, including targeting the reckless lending and the market incentives that the industry has used to bilk homeowners for the past several years.
Yet for the-admittedly small-group of homeowners who do qualify, the rate freeze will be a welcome blast of cold air in the subprime housing inferno.