Bush offers help to troubled homeowners

NEW YORK (CNNMoney.com) -- President Bush outlined his plan Friday for helping troubled subprime borrowers keep their homes. The initiatives target hundreds of thousands of distressed homeowners.

Speaking in the Rose Garden, the president, after highlighting some of the recent stronger economic trends, pointed out the weaknesses in the mortgage market as an area of concern, particularly in the subprime sector.

Although he labeled the problem "modest in the overall scheme of things," he said, "It's anything but modest if you're one of the families affected."

Foreclosure rates have soared over the past year as homeowners struggle to pay off loans that have become more expensive as they mature. Many are hybrid adjustable rate mortgages (ARMs), the so-called toxic ARMs, that carried very low initial interest rates ("teaser rates") for the first two or three years of their term but then reset to much higher rates after that.

Consumers now shun ARMs

The proposals put forward by the president included increasing the help offered by the Federal Housing Authority to troubled borrowers. That may take the form of expanding the pool of borrowers who can apply to the FHA to refinance their loans.

The president wants to work with Congress to temporarily suspend the tax liability that can take effect when borrowers lose their homes through short-sales, and when lenders forgive mortgage debt. That will enable borrowers to more easily rework their loans.

"I believe we need to change that code," said the president, "so people won't be penalized when they refinance their homes."

Bush also discussed putting together a coalition of community groups, government agencies and government-sponsored enterprises, such as Freddie Mac to help homeowners refinance onerous loans. That would include making credit available as well as counseling borrowers on credit issues.

The president also wants to press efforts to combat predatory lending where unscrupulous mortgage brokers and lenders take advantage of naive consumers by steering them into mortgages that are extremely profitable for the brokers and lenders but ultimately unaffordable for borrowers.

Another of the president's goals is to increase transparency in lending practices so consumers would better understand the true risks and costs of loans they sign up for. That could reduce the number of borrowers facing the loss of their homes in the future.

The fallout from the mortgage meltdown crisis has spread beyond the home-lending and housing industries. It has resulted in a liquidity squeeze that has reached into the corporate world and increased borrowing costs for any less than low-risk propositions.

One thing the president promised not to do was a direct bailout of homeowners facing foreclosures or of lenders with financial problems traced to portfolios of defaulting subprime loans.

Such bailouts, he said, "would only aggravate the problem."

The administration has been slow to tackle the issues head-on, even as Congress has addressed it in a series of hearings before House and Senate subcommittees starting last spring. Some of the Democratic presidential candidates have also weighed in with plans for relieving distress among subprime borrowers.

Reaction poured in after the president's speech.

John M. Robbins, chairman of the Mortgage Bankers Association (MBA), released a statement that said, "Many of the proposals President Bush rolled out today are ones for which we have long advocated, even before the recent troubles in the subprime mortgage market."

Chuck Schumer, the Democratic senator from New York, said, "The president stepped up to the plate and made some constructive suggestions."

Schumer's analysis calls for a three-part initiative to the subprime crisis:

• Supplement the help to borrowers that community and non-profit groups provide. These organizations have taken over much of the responsibility for credit counseling and financial advice that loan officers once provided. As part of that, mortgage servicers could be rewarded for providing refinancings for subprime borrowers by giving them the lucrative rights to service these accounts.
• More money to help pay for refinancings through government-sponsored enterprises, which includes increasing the cap limits on loans that Freddie Mac and Fannie Mae can purchase.
• Mortgage broker regulation to bring rogue originators in line. "We urge the president to take off his ideological blinders and support this," said Schumer.

According to Dean Baker, an economist and co-director of the Center for Economic and Policy, many of the Bush initiatives would leave unaffected many of those homeowners in the most serious trouble.

The suspension of tax liabilities would not mean much to low-income foreclosure victims, who don't pay much tax anyway. It could, on the other hand, help wealthier real estate investors who speculated on real estate during the boom.

"I don't see any reason at all to give those people a break," said Baker.

But according to Mark Zandi, economist for Moody's Economy.com, the tax initiative could help even lower-income homeowners. They could have $200,000 mortgages that their lenders would be willing to reduce to $150,000, but the tax liability would make that undoable. Suspending that liability could help.

"Enough homeowners could benefit to make a difference," said Zandi.

Also not prime candidates for government bailouts, in Baker's view, are Wall Street investors, who the Bush proposals could help by giving defaulting borrowers an out through FHA refinancings.

Said Baker, "There should be zero interest in helping out Wall Street. You don't want money from taxpayers to go to people who made risky investments."