The Bush administration has ironed out a mortgage rate-freeze plan for subprime borrowers with loans made at the start of 2005 through July 30 of this year. - File
The Bush administration has hammered out an agreement with industry to freeze interest rates for certain subprime mortgages for five years in an effort to combat a soaring tide of foreclosures, congressional aides said Wednesday.
These aides, who spoke on condition of anonymity because the details have not yet been released, said the five-year moratorium represented a compromise between desires by banking regulators for a longer time frame of as much as seven years and industry arguments that the freeze should only last one to two years.
Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between January 1, 2008, and July 31, 2010.
The administration said that President Bush will speak on the agreement at the White House on Thursday, and the Treasury Department announced that Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson would hold a joint news conference Thursday afternoon with officials of the mortgage industry.
Treasury also announced that there would be a technical briefing to explain more of the details of the proposal.
Paulson, who has been leading the effort to craft a plan, said on Monday that the programme would only be available for owner-occupied homes — as a way to make sure that the break is not granted to real estate speculators.
The plan emerged from talks between Paulson and other banking regulators and banks, mortgage investors and consumer groups trying to address an avalanche of foreclosures that are feared as an estimated 2 million subprime mortgages reset from lower introductory rates to higher rates.
Lower mortgage rates
The higher rates in many cases will boost monthly payments by as much as 30 per cent, making it extremely difficult for many people to keep current with their loans.
The plan is aimed at homeowners who are making payments on time at lower introductory mortgage rates but cannot afford a higher adjusted rate.
Through October, there were about 1.8 million foreclosure filings nationwide, compared with about 1.3 million in all of 2006, according to Irvine, Calif-based RealtyTrac Inc.
With home loan defaults still rising, the trend is expected to worsen next year.
Mortgage crisis
The plan represents an about-face for Paulson, who until recently had insisted that the mortgage crisis could be handled on a case-by-case basis.
However, he and other ad-ministration officials became convinced that the tide of foreclosures threatened by the mortgage resets represented such a severe threat that a more sweeping approach was needed along the lines of a plan put forward in October by Sheila Bair, head of the Federal Deposit Insurance Corp.
Paulson and other federal regulators began holding talks with some of the country's biggest mortgage lenders, mortgage service companies, investors who hold mortgage-backed securities and non-profit groups that provide counselling for at-risk homeowners.
Credit histories
Under the typical subprime loan, those offered to borrowers with spotty credit histories, the rates for the first two years were at levels around 7 per cent to 9 per cent.
But after two years, those rates were scheduled to reset to levels around 9 per cent to 11 per cent.
For a typical US$1,200 monthly mortgage payment, the reset could add another US$350 to the monthly payment, greatly raising the risks of loan defaults by homeowners struggling with the current payment.
The wave of mortgage fore-closures threatened to make the most severe slump in housing even worse by dumping more foreclosed properties on to an already glutted market, further depressing home prices and shaking consumer confidence.
- AP
