By Patrick Rucker and John Poirier Thu Dec 6, 5:44 PM ET
WASHINGTON (Reuters) - President George W. Bush announced a plan on Thursday aimed at slowing a wave of home loan foreclosures that has threatened to knock the U.S. economy into recession and rattled investors worldwide.
Instead, the Bush administration hopes that it can help more than half of the two million homeowners who took out adjustable-rate subprime loans with payments due to move sharply higher soon by offering some of them a five-year mortgage-rate freeze.
Officials have said 500,000 Americans are at risk of losing their homes as $367 billion worth of mortgages reset to higher interest rates over the next two years. Expensive subprime loans traditionally are aimed at borrowers with weak credit, but increasing numbers of buyers took the loans as an easy way to hop into the market during the housing boom.
The Mortgage Bankers Association said on Thursday that a record percentage of mortgages outstanding were in the process of being foreclosed in the third quarter, while late payments hit their highest level since 1986.
Bush said an estimated 1.2 million homeowners could be eligible for assistance under the plan over the next couple of years. However, private-sector analysts said the numbers would likely be much lower.
"In theory, the plan could help as many as 750,000 subprime homeowners," said Mark Zandi, chief economist for Moody's Economy.com. "In practice, my sense is that it will probably help at best about 250,000 homeowners."
"DEVIL IS IN THE DETAILS"
Homeowners facing a rate reset who have shown they are a reasonable credit risk, but who could not afford higher payments, would qualify for "fast-track" loan modification and the five-year interest rate freeze. Only owner-occupied homes would be eligible, not those bought by speculators.
Borrowers who can afford their current loan terms would receive help in refinancing, but those who cannot and were poor credit risks would probably still lose their homes.
"The Bush administration's foreclosure plan is an encouraging first step, but the devil is in the details. I'm anxious to see how many families this plan will actually benefit," said Kwame Kilpatrick, mayor of Detroit, which has been hard-hit by the subprime mortgage mess.
Many of the loans were repackaged as securities and sold to investors around the globe. As defaults rose, credit markets seized up as investors scrambled to try to determine who was facing losses and how large they might be.
U.S. Treasury Secretary Henry Paulson said the plan would buy time to allow the economy to work through its ills. "What five years does is it gives ... us as a country, a chance to work through this housing cycle," he said.
While avoiding a wave of foreclosures would likely bolster an already wobbly economy, ratings firm Standard & Poor's said freezing rates on subprime mortgages may lead to further deterioration in credit ratings on bonds backed by the loans.
Some on Wall Street worried they would be forced to accept mortgages rewritten in the borrowers' favor.
"To say to investors that the terms of the contract you signed are going to be overwritten is a clear disincentive to investors to provide capital going forward," said Larry Smith, chief investment officer at Third Wave Global Investors in Greenwich, Connecticut. "That's just not what government is supposed to do."
Nonetheless, investors cheered the news, sending Wall Street stocks sharply higher on views that limiting foreclosures would keep the economy from sliding into a recession.
The plan would offer a five-year rate freeze to subprime borrowers who took out loans from January 1, 2005, through July 31, 2007, that are due to reset over the coming two-and-a-half years.
Democrats welcomed the plan, but said more was needed.
House of Representatives Financial Services Committee Chairman Barney Frank applauded the effort, but said it would punish borrowers whose credit had improved. As envisioned, those homeowners could be considered strong enough to handle a rate reset.
Answering those concerns, Federal Deposit Insurance Corp Chairman Sheila Bair said the plan was an "initial" move and subject to further refinement.
(Additional reporting by Jeremy Pelofsky, Tabassum Zakaria, Lisa Lambert and Glenn Somerville in Washington, Lynn Adler in New York and Karen Pierog in Chicago; writing by Patrick Rucker and Emily Kaiser; Editing by Dan Grebler)