Not all the homeowners who face huge jumps in their subprime mortgage payments appear likely to be helped by the relief plan announced Thursday by President Bush.
Nevertheless, the plan rankles many thrifty people who are saving money to buy a home and being careful not to get in over their heads with hefty mortgages they know they cannot afford.
When Casey Johnson and his wife moved to San Diego three years ago, they couldn’t find a home in their price range. Rather than over-leverage themselves with a risky mortgage, the couple rented an apartment in La Jolla, Calif., and waited for the housing market to drift back to earth, hoping they hadn’t missed their chance to become homeowners.
To them, President Bush’s plan feels like a “slap in the face,” Johnson said.
He and many others in similar circumstances fear that any effort to prevent foreclosures could keep home prices from falling to an affordable level.
“I try to do the right thing, which is to have a down payment and a job and to be fiscally responsible, and it basically looks like it’s not going to pan out if this subprime bailout goes through,” said Johnson, 34.Proponents of the Bushbacked plan, under which interest rates would be frozen for five years for some adjustable-rate borrowers in danger of losing their homes, say the relief effort would help unsophisticated home buyers who were misled by mortgage salespeople into taking on high-risk loans.
Supporters also say the program is needed to keep the housing crisis from sending the country’s economy into a recession. A majority of the country’s politicians appear to be in favor of the plan, with some saying it doesn’t go far enough.
But the undercurrent of antagonism to the program is strong and is given support by an economic principle that says people tend to act recklessly if they know they’ll be pro! tected from the consequences. By that logic, aiding borrowers ! who are in trouble now will only encourage future borrowers to take on too much risk.
“Should you and I be bailing out people who lied about their incomes, bit off more than they could chew or were too lazy or ignorant to understand what kind of an obligation they were entering into?” asked Michael Darda, chief economist at MKM Partners, a brokerage company in Greenwich, Conn. “I understand there are sleazy people in the mortgage area, but what I don’t hear from politicians is: ‘Does the individual bear any responsibility for this problem?’ ”
Ed Skebe of Manhattan Beach, Calif., would agree that even if some people were duped by shady mortgage brokers or loan officers, many home buyers knew they couldn’t afford the homes they were buying and rolled the dice anyway in hopes that the boom had enough life to shower them with profits.
“They hurt everyone. They drove the prices up,” said Skebe, a 61-year-old! program manager at an air-freight company who said the booming housing market prevented him from trading up to a larger home. “It’s hard for me to believe that someone didn’t realize they couldn’t afford a $600,000 home.”
The worst potential consequence, critics say, is if the government’s actions prop up a home market that easy financing helped inflate. That, they say, would delay the eventual day of reckoning when property values settle at their natural levels, keeping many would-be buyers locked out of the market in the meantime.
“I definitely see where these people are coming from,” said Tracey Seslen, an assistant professor of finance at Marshall School of Business at the University of Southern California.
But she and others say there are no ideal public-policy options in the subprime crisis, and the overriding goal is to head off a sharper housing downturn that drags the economy into recession.
!e U.S. economy.”
Nearly 2 million adjustablera! te subpr ime mortgages will reset from introductory rates of around 7 percent to 8 percent to much higher rates this year and next. That raises the specter of even more people being forced out of their homes because they cannot keep up with their monthly payments.
Bush promoted the initiative Saturday, using his weekly radio address to call it “an example of the government bringing together members of the private sector to voluntarily address a national challenge — without taxpayer subsidies or government mandates.”
Bush said 1.2 million people could be eligible for relief, either the rate freeze or refinancing into more affordable mortgages.
The rate freeze offer would be available only to people who have not missed any mortgage payments at their introductory interest rate. It also would apply only to loans taken out between 2005 and this past July 31 and scheduled to rise to higher rates in Jan. 1, 2008, and July 31, 2010. To make sure specula! tors don’t get the break, the rate freeze offer applies only to people living in their homes.
The idea is that the five-year freeze will buy time for the housing sales and prices to start rising again. Such a rebound would enable homeowners to refinance their current adjustable rate mortgages into fixedrate loans with more affordable monthly payments.
Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association in the third quarter, a record 18.81 percent of them were past due. A record 4.72 percent of the loans entered into the foreclosure process during that period.
Meanwhile, there still is the possibility that investors, who were counting on bigger returns from the higher rate resets, will balk at extending the duration of the lower rate.
“When the government comes in and says you have contracted to have this arrangement and you can no longer have it, I think it opens the door for lawsuits,&#! 8221; said Milton Ezrati, senior economist and market strategi! st at Lo rd Abbett & Co. in Jersey City, N.J.
“It could end up there’s less confidence in the viability in the bond markets and the mortgage markets going forward and it could lead to higher interest rates and higher mortgage rates for everybody,” said Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets.
The American Securitization Forum, the New York-based industry group that worked with regulators to forge the deal, said Bush’s plan is designed to work within the existing contracts. As part of a typical bond contract, servicers are required to modify loans only when it would yield more cash to debt holders than a foreclosure. Agreements also state that loans can’t be modified unless a default is “reasonably foreseeable.”
Servicers will be acting in the best interest of bond investors because foreclosures would cause greater losses, the ASF said.
“The initial reaction ! of a lot of people including myself a week ago would have been, ‘Hey this isn’t fair,’ ” said Andrew Harding, chief investment officer for fixed income at Allegiant Asset Management in Cleveland.
“It isn’t fair,” he said, “but it most likely is in the best interest of both those who are making payments and those who can’t make higher payments.”
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