Treasury Secretary Offers Sub-prime Bailout Plan

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U.S. Treasury Secretary Henry Paulson offered a Band-Aid from the Bush administration to stem the foreclosure hemorrhage. While short on details so far, he has been working to rally lenders, loan servicers and investors in this latest effort to help homeowners.

A key component of the plan would be to freeze interest rate levels on adjustable mortgages before they reset to higher rates, Paulson said.

He didn’t offer much as to how this would work, but he did say who the plan would not help: the large number of homeowners now stretched by their mortgage payments.

According to the Mortgage Bankers Association, 5.12 percent of outstanding loans were in default in the second quarter, a rate about 17 percent higher than a year ago.

Paulson said the plan would be geared most toward those who can afford their mortgages now, but won't be able to, to after the adjustment.

Those left out in the cold: Borrowers who can afford a rate adjustment; those who are already behind on their payments; borrowers who hold option-ARMs that aren't subprime; those who can refinance into a fixed-rate loan; and those who bought homes as investments.

More than 50 percent of the increase in delinquent mortgages is actually investor-related, said Mark Vitner, a Wachovia senior economist.

"It's hard to conceive how many people are actually going to meet this criteria. There's nothing at all in there that addresses investors," he said, adding he doesn't support an investor bailout.

The limited scope of the plan has caused some consumer advocates to ask whether it goes far enough.

As the proposal stands now, the group that will be helped represents just a narrow slice of the subprime borrowers in trouble, said Michael Shea, housing director of the Association of Community Organizations for Reform Now. "It helps. Don't get me wrong. ... But it's disappointing that we are nearly a year into the crisis and the treasury secretary is dealing with the easiest part of the problem."

Lisa Rice, vice president of the National Fair Housing Alliance, a national organization dedicated to ending housing discrimination, agreed with Shea.

"It won't help the majority," she said. "It's only going to help that one bucket, and it's hard to say how large that bucket will be without knowing the details of how the Treasury Department will assess affordability."

To help homeowners who aren’t addressed in the plan, Paulson said the Administration would recommend that state and local organizations extend their programs to help stretched owners refinance into fixed-rate mortgages. He also pointed to proposed modifications to the Federal Housing Administration that would make FHA loans, which can be more affordable, easier to get.

John Taylor, president of the National Community Reinvestment Coalition, said that if the government relies on mortgage counseling programs and state- or city-backed bailouts to address the rest of threatened homeowners, the foreclosure problem might get worse. "You can't counsel a loan down. This isn't happening because those people don't know how to pay their bills. They need a loan modification."

Convention in the lending industry is that a family can afford to spend 28 percent of its gross income on housing. But an index put together by the National Association of Home Builders and Wells Fargo suggests that most homeowners spend more than that.

According to the NAHB-Wells Fargo Housing Opportunity Index, only 42 percent of homes sold in the third quarter were affordable to households earning the nation's median income.

Part Two - Who the Treasury Secretary's Mortgage Bailout Plan Doesn't Help

Part Three - More Glicthes in the Treasury Secretary's Mortgage Bailout Plan