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Bush’s mortgage plan draws mixed reactions

No relief for those who can’t keep up teaser rate payments

(WASHINGTON) President Bush’s plan to slow the mortgage meltdown could help hundreds of thousands of people from losing their homes, but many others would get no relief – and the plan’s effect on the broader economy remains a topic of sharp debate.

Under the plan outlined on Thursday, lenders would be given broad latitude to fix troubled loans, notably those with low introductory teaser rates that will reset to higher payments between Jan 1, 2008, and July 31, 2010.

Such modifications would remain voluntary, however, triggering strong criticism from Democrats and consumer advocates.

The biggest winners could be struggling borrowers who nonetheless have kept current with their adjustable loans but cannot afford to refinance when their teaser rates expire. There are an estimated 600,000 of these borrowers, and they might be able to have their low rates frozen for five years.

But borrowers who took out teaser-rate loans to speculate in the housing market likely would be losers, because the plan excludes mortgages where the borrower doesn’t live in the home as a primary residence.

People whose loans already have reset to higher rates won’t necessarily get relief either, nor would an estimated 600,000 borrowers who can’t keep up with their payments even at the low introductory rates. Officials acknowledged that for those borrowers, foreclosure and a return to the rental market is probably inevitable.

By some estimates, nearly 2 million Americans are in danger of losing their homes over the next two years.

Economists say a wave of foreclosures that large could sink the economy into a recession, raising unemployment and spreading hardship to many more Americans.

Treasury Secretary Henry Paulson, who spent weeks spearheading negotiations among mortgage servicers, investors and groups representing borrowers, said troubles in the housing market are the ‘biggest risk to the economy’.

‘This is not a silver bullet,’ Mr Paulson said after meeting with Mr Bush. ‘We can’t put together an industry-wide initiative and suddenly make the excesses and the bad lending practices and so on of the last number of years go away.’

Yet economist Edward Leamer, director of the UCLA Anderson Forecast, said the Bush plan does exactly the opposite of what is needed to revive the housing market by artificially propping up housing values.

‘The market needs buyers,’ Mr Leamer said, and they need to be lured by lower prices and lower mortgage rates.

The design of the Bush plan ‘is deleterious to both of those ends’ by enabling people to stay in houses they can’t afford, while driving lenders to raise rates on new mortgages.

Consumer advocates, however, contend that many of the people facing foreclosure were misled by brokers, who earn higher fees on sub-prime loans designed for people with shaky credit – the kinds of loans that are most likely to go into default.

 

Source: LAT-WP (Business Times 8 Dec 07)

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