Source URL: http://www.msnbc.msn.com/id/22133277/

White House unveils subprime rate freeze plan

By Ben White in New York

US President George W. Bush on Thursday formally unveiled a plan to freeze interest rates on some subprime home loans for five years, setting up potential showdowns with mortgage security investors who could see their returns decline and Democrats who say the plan does not go far enough to help troubled homeowners.

The plan, negotiated over a series of meetings with industry executives, is intended to forestall a wave of foreclosures over the next two years as nearly $400bn worth of home loans made to risky subprime borrowers reset at higher interest rates.

The introduction of the plan came as the Mortgage Bankers Association said US home foreclosures reached a record high in the third quarter, with 1.7 per cent of outstanding loans in the foreclosure process.

Under the plan, mortgage servicers would agree to the five-year rate freeze voluntarily. The plan would apply to subprime adjustable mortgage loans taken out between January 2005 and July 2007, with rates to rise between January of 2008 and July of 2010.

It would apply only to borrowers who had less than 3 per cent equity in their homes and were either current on their payments or no more than 60 days behind. The rate freeze would not include borrowers able to handle higher payments or those unable to make payments even under their current lower rate.

A Barclays analysis suggested that only 12 per cent of subprime borrowers, or 240,000 homeowners, would he helped by the freeze. ([color="Blue"]Poster's Note: This, coincidentally, is roughly the same percentage of the population that blacks constitute in the US.) Mark Zandi, chief economist for Moody's Economy.com, also put the number at about 250,000.

The plan would also seek to switch as many borrowers as possible with subprime adjustable rate mortgages into more sustainable loans.

Mr Bush's proposal would identify borrowers eligible for refinancing and fast-track them into new loans offered by the Federal Housing Association and private lenders.

The proposal can proceed without legislation. But the administration would need congressional app*roval to raise the size of home loans offered by the FHA.

Democrats criticised elements of the plan. Barney Frank, chairman of the House financial services committee, said it was a "grave error" to screen borrowers based on their credit score as it punished those who have sought to keep their score high.

Representatives of mortgage security investors also raised questions. "The modification of existing contracts, without the full and willing agreement of all parties to those contracts, risks significant erosion to 200 years of contract law," said Josh Rosner, consultant at Graham Fisher.

He also suggested that modifying loans may only help prolong the crisis. "If a borrower is modified . . . and home prices fall further, the borrower who re-defaults is straddled with a larger obligation including fees on an asset whose value has declined."