Putting a freeze to mortgage meltdown

Bob Moon Dec 6, 2007

Putting a freeze to mortgage meltdown

Bob Moon Dec 6, 2007

KAI RYSSDAL: I’m not sure I did it justice with that voice. Maybe it was, I don’t know, a little bit lame, but there was just a taste of infomercial in the president’s press conference this morning. The White House unveiled its official response to the subprime crisis today. The details we’ve already told you about:

A rate freeze for a small slice of the 2 million adjustable rate mortgages that are going to move higher over the next two years. A chance for those not covered by the freeze to renegotiate their loans. And of course the hotline number. The president had it wrong, by the way. It’s 888-995-HOPE, not an 800 number.

But be that as it may, the president made it clear this morning who the plan is not going to help.

PRESIDENT BUSH: We should not bail out lenders, real estate speculators, or those who made the reckless decision to buy a home they knew they could never afford.

Marketplace’s Bob Moon has been covering all things subprime for us. Hiya, Bob.

BOB MOON: Hello, Kai.

RYSSDAL: Before we get into details and who said what, what was the reception for this plan today?

MOON: Well, you know, Kai, I often use metaphors to help cut through the…

RYSSDAL: Yes you do, you’re known for it. We count on you for it.

MOON: …that’s right, cut through to the essence of these complicated economic stories that we cover. Well, here are just a couple from some of those we heard from today.

“This is a Band-Aid when the patient needs major surgery.”

That’s a complaint about the small fraction of strapped homeowners that this plan is going to help. And it’s also a slap at Congress for dragging its feet on legislation that consumer advocates say is long overdue to stop the predatory lending practices that got us into this mess. The critics say that that’s not part of this measure, and it’s really the only thing that’s going to restore the lost confidence that’s caused financial institutions to stop making loans even to those with good credit. And here’s another harsher assessment:

“It amounts to a stay of execution, not a pardon.”

That’s a reference to this plan giving those who qualify a temporary reprieve from any jump in interest rates — but only for five years. Some critics say that just hands the problem off to the next administration — so this is just a temporary fix, not a real solution.

RYSSDAL: But really, it does buy these homeowners some time, right?

MOON: Well, yes. And as a matter of fact, we did hear some support for that part of the strategy today from chief economist Mark Zandi at Moody’s Economy.com. He told us by that time, it just might be possible for some of these folks to find a lender who is willing to refinance.

MARK ZANDI: Hopefully, two, three, four, five years down the road the credit markets will be operating normally — or at least more normally. And at least house prices won’t be falling, maybe they’ll be rising as we normally see. And in that kind of environment, some of these folks will be able to hold onto their home.

MOON: But Zandi does say that that assumes homeowners will be able to weather a very bad storm that’s still ahead. He says he’s already factored in the administration’s new plan — and even then, he’s predicting a crash in home prices that will add up to more than 30 percent in many parts of the country before this crisis is over.

RYSSDAL: How many homeowners are people thinking are going to be actually helped by this plan?

MOON: Some. Some. Nobody knows for sure, because there are still a lot of pieces that have to fall into place. We spoke to John Taylor. He heads the National Community Reinvestment Coalition. He expanded on that “Band-Aid versus major surgery” metaphor we mentioned earlier. He says there are too many patients — as many as 2 or 3 million who face foreclosures:

JOHN TAYLOR: What’s been offered, at best, will probably not help more than 300,000 of the borrowers, so maybe 10 or 15 percent. It’s simply not enough.

And there’s even a question then, about whether this plan is going to survive in the courts, Kai. If Wall Street can’t convince investors who hold all those mortgage-backed securities to go along with it, then it may be dead on arrival.

RYSSDAL: Yeah, but wouldn’t that be better than nothing, if the homeowners actually do default?

MOON: Well, that’s really the big-money question here. University of Maryland economist Peter Morici told us that if you’re an investor who’s been counting on getting a payback, and now that’s going to be delayed, you might just hold out for a better deal and challenge this one in the courts.

PETER MORICI: So many different people hold the bonds that are backed by mortgages. These include retirees and their pension funds, mutual funds and so forth. The president can’t just by the stroke of a pen freeze these interest rates in place without expecting litigation problems. That’s why it’s important to write new loans that move these borrowers into permanent fixed-rate mortgages, and repay these bonds.

MOON: But that just might require the government to bail out these lenders, and that’s something that President Bush said today he just doesn’t want to do.

RYSSDAL: Yeah, and back to that thing Peter Morici was just talking about. You know, Henry Paulson had a news conference after the president did — Secretary of the Treasury — and he specifically said, “Gosh, I hope this doesn’t lead to cases in the court from these people who hold these mortgage-backed securities.”

MOON: I think that’s the sound of crossed fingers.

RYSSDAL: Crossed fingers. Marketplace’s Bob Moon. Thank you, Bob.

MOON: Thanks, Kai.

RYSSDAL: Had they tried, White House staffers probably could have picked a better day to dip their toe into real estate because out in the actual market the news was far less rosy. The Mortgage Bankers Association said today almost a million households in this country are in the middle of foreclosure proceedings.

The country’s biggest builder of luxury homes, Toll Brothers, reported its first quarterly loss in 21 years this morning. And one analyst said he now thinks housing won’t turn around until 2010.

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