Bush to put freeze on subprime mortgages

US President George W. Bush is set to announce a freeze on some subprime mortgages in an effort to stop a wave of foreclosures undoing the six-year expansion.

Bush is scheduled to make a statement on the housing industry early this morning (Beijing time) in Washington and Treasury Secretary Henry Paulson speaks at a press conference later today.

Paulson and regulators forged the agreement with lenders that will fix interest rates on some loans for five years, said people familiar with the plan. The deal is focused on borrowers who will fall behind once initially low rates reset to higher levels through July 2010.

The housing slump, now in its third year, is pushing home values down and restraining economic growth, which economists estimate will be less than 1 percent this quarter. The collapse in the market for securities backed by subprime mortgages cost the chief executive officers of Merrill Lynch & Co and Citigroup Inc their jobs, roiled markets from Auckland to New York and forced the Federal Reserve to cut interest rates twice.

"The magnitude of the economic impact on housing prices in the absence of this plan under current conditions is large," said Susan Wachter, professor of real estate at the University of Pennsylvania's Wharton School in Philadelphia.

More than 30 percent of borrowers with subprime adjustable-rate mortgages are behind on their payments before their loans reset higher according to estimates from analysts at Credit Suisse Group.

The bank projects 775,000 homes with $143 billion of mortgage debt will go into foreclosure in the next two years.

Neighborhood threat

"We know when foreclosures hit, it brings down the value of the neighborhood by 20 percent," said David Olson, president and co-founder of Wholesale Access Mortgage Research and Consulting Inc in Columbia, Maryland. "That's what they are trying to avoid."

Officials and executives from companies including Citigroup, Wells Fargo & Co and Washington Mutual Inc spent much of the past week negotiating over how long to extend starter rates on subprime mortgages, which are usually given to people with poor or incomplete credit histories.

The freeze will apply to mortgages issued between January 2005 and July 2007 that are scheduled to reset between January 2008 and July 2010, said the people familiar with the plan.

To be eligible, borrowers must not be more than 60 days behind in their payments, have less than 3 percent equity in their property and be unable to afford higher interest rates once starter rates increase.

The accord may help between 200,000 and 500,000 borrowers, representing as much as a quarter of the 2 million adjustable-rate mortgages due to reset over the next two years, according to Olson.

Bloomberg News

(China Daily 12/07/2007 page16)