President Bush offered a three-pronged solution Thursday to stem the flow of mortgage foreclosures, saying private lenders and the government have joined together "to limit the disruption to our economy."
The deal, the outcome of the Hope Now Alliance of public and private sector officials, calls for a five-year freeze on interest rates for those who can now afford to keep paying their mortgages, but would be at the risk of foreclosure if their adjustable rates ballooned at the end of the locked period.
"Hope Now is an example of government bringing together members of the private sector to voluntarily address a national challenge without government subsidies and without government mandates," Bush said, combating complaints that the government should not be in the business of bailing out shifty lenders or overstretched borrowers.
The president said 1.2 million homeowners could potentially benefit from the program, which has been coordinated on the government side by Treasury Secretary Hank Paulson and Housing Secretary Alfonso Jackson.
Since the program is a voluntary effort, Bush said so only those who ask for help will get it. He encouraged local officials to help out, and urged borrowers to call a new hot line: 1-888-995-HOPE.
In addition, Bush said the Federal Housing Administration is launching a new program called FHA-Secure, which would help refinance existing loans to borrowers whose ARMs are going up, and enable FHA to be more flexible in how to offset the refinancing.
Bush added that the federal government is also taking regulatory actions "to make the mortgage industry more transparent, reliable and fair."
"Later this month, the Federal Reserve intends to announce stronger lending standards that will help protect borrowers," he said. Disclosure requirements for lenders will also become more stringent and the Department of Justice will pursue banking and housing industry agents who defrauded American consumers with deceptive lending practices.
Bush also said Congress has a role to play, including modernizing FHA, enabling government sponsored enterprises like Freddie Mac and Fannie May to move more liquidity into the market and making a temporary fix to the tax code. He blamed them for not moving quickly on legislation begun early this year.
"Congress needs to temporarily reform the tax code to help homeowners refinance during this time of housing market stress. Under current law, if the value of your house declines and your bank forgives a portion of your mortgage, the tax code treats the amount forgiven as taxable income," Bush said. "When you're worried about making your payments, higher taxes are the last thing you need."
Thursday's announcement followed the news that home foreclosures surged to an all-time high in the July-September period. The Mortgage Bankers Association reported that the percentage of all mortgages that started the foreclosure process in the third quarter jumped to a record 0.78 percent, surpassing the previous record of 0.65 percent of all mortgages in the second quarter.
The administration's effort is aimed at stemming a further tidal wave of foreclosures in coming years as 2 million subprime mortgages -- loans provided to borrowers with spotty credit histories -- reset from their introductory rates of around 7 percent to 8 percent to levels as high as 11 percent, adding hundreds of dollars to the typical monthly payment.
A recent surge in mortgage defaults, part of the worst housing slump in more than two decades, has piled up billions of dollars in losses for big banks, hedge funds and other investors while roiling financial markets worldwide. Some economists think the housing bust may become severe enough to push the country into recession.
The Federal Reserve is announcing stronger lending standards this month, while the Housing and Urban Development Department and federal banking regulators are acting to improve disclosure requirements, he said.
This offer would apply only to people living in their homes and who have not missed any payments at the lower rate. It also only would apply to loans taken out between 2005 and this past July 30 and scheduled to rise to higher rates in 2008 and 2009.
The hope 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 fixed-rate loans with more affordable monthly payments.
But even Treasury Secretary Henry Paulson, who led the negotiations with the mortgage industry, acknowledged the effort is "not a silver bullet."
"We face a difficult problem," he said.
Skeptics also showed no appreciation for the plan. Sen Charles Schumer, D-N.Y., said the plan’s narrow eligibility requirements would exclude most distressed homeowners, and wondered whether legal challenges by investors in mortgage-backed securities may stall the effort.
"While we certainly all hope this will be a shot in the arm for the housing slump, it is hardly a panacea," Schumer said, noting that 22 percent of subprime loan holders are excluded from the plan because they are behind on their payments.
"There are too many families who may be left out, too much left up to the voluntary willingness of the private sector, and too little disclosure and transparency to ensure families who do qualify are being helped," Schumer said.
The big sticking point in the negotiations was getting investors who had purchased the mortgages after they were bundled into securities to agree to accept lower interest payments. Critics have said even with a deal, there are likely to be lawsuits. But officials representing major players in the mortgage industry said they believed the plan would withstand any legal challenges and would help at-risk homeowners avoid defaulting on their mortgages.
George Miller, executive director of the American Securitization Forum, which represents companies that package mortgages into mortgage-backed securities, told reporters he expected the industry would face suits from investors unhappy that the original terms of the mortgages have been modified.
The Associated Press contributed to this report.