Clinton calls for subprime rate freeze

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NEW YORK (CNNMoney.com) -- Senator Hillary Clinton spelled out the details of her subprime bailout plan Wednesday, calling for a 90-day moratorium on foreclosures and a five-year freeze on the interest rates of adjustable rate mortgages (ARMs).

In August, the democratic presidential hopeful asked legislators to ban prepayment penalties on mortgages, but her new plan goes much further, and bears similarities to other proposals, including one expected to be offered by the Bush administration soon.

Clinton had already outlined her proposal in a letter to Paulson on Monday - the letter was posted onto her Web site - but on Wednesday she formally unveiled the comprehensive plan.

The rate freeze proposal would halt interest on ARMs from resetting above their low, introductory rates. Those resets can turn barely affordable mortgages into hopelessly unaffordable ones for many home owners.

"The average reset will increase the monthly payment by 30 percent to 40 percent," she said. A freeze would afford hard-pressed borrowers relief until the ARMs could be converted into fixed rate loans.

Clinton's freeze plan, which she unveiled at the Nasdaq Stock Market in New York, applies only to owner-occupiers, not real estate investors. Otherwise, no class or time frame of subprime ARMs issued was mentioned.

Interest rates on resetting ARMs can jump from 7 percent or less to 10 percent or more, costing borrowers hundred of dollars a month more.

The Clinton freeze proposal will cover both borrowers who are current with their ARM payments and ones who have fallen behind.

The 90-day foreclosure moratorium is meant to give lenders and mortgage servicers time to sort through the large numbers of borrowers who may benefit from the freeze, so none will lose their homes simply because servicers do not have the systems and staff in place to reach all the affected borrowers.

In addition to these main provisions, the Clinton plan also would require that lenders provide ongoing status reports on how many mortgages they modify and the types of modifications made. Earlier this year, Moody's revealed that servicers had modified few of the resetting subprime ARMs.

Despite congressional scrutiny, media coverage and pressure from community advocates, "the industry has modified only 1 percent of at-risk mortgages so far this year," said Clinton.

According to Clinton, we cannot take the lending industry at its word that it will follow through on agreements to convert loans expeditiously.

Kurt Pfotenhauer, a senior vice president for government affairs with the Mortgage Bankers Association, said that Clinton would get "most of what she asked for" with the Bush plan.

But the industry would not support a foreclosure moratorium, he said. "That disincentivizes people from seeking the loan modifications they need to stay in their houses," he said.

The senator promised that, if her provisions are not included in an agreement Paulson reaches with lenders, she will push for legislation that will enable loans to be reworked without first obtaining the permission of investors.

Servicers are reluctant to rework loans due to contractual obligations with the actual owners of the liens, the investors. Protecting servicers against investor lawsuits may encourage them to modify more mortgages for home owners in distress.

Pfotenhauer endorsed Clinton's plan to bar investor lawsuits for modifying loans. "Some indemnification from future lawsuits would let servicers sleep easier at night," he said.

The MBA is also solidly behind the plan to have regular status reports on mortgage modifications. "We think there's so much disinformation and hype out there," said Pfotenhauer, "we want the real stats reported."

John Taylor, CEO for the National Community Reinvestment Coalition, a consumer rights group, said that "Clinton's seeing parts of the problem that we're concerned [the administration] is not. The government needs to take some financial responsibility."

Although "The freeze is good," he said, "We have to go further so that the consumer does not have to go through the same problem two or three years from now. The loans have to match the consumer's ability to pay."

Clinton's proposal also calls for up to $5 billion in funds to help hard-hit communities and individual borrowers withstand the foreclosure crisis. Part of the money would go to financial counseling, which has proven successful in helping borrowers work through solutions with lenders.