The administration of US President George W. Bush has come up with a plan to help strapped homeowners facing a daunting jump in their monthly mortgage payments.
The proposal, which was hammered out in negotiations led by Treasury Secretary Henry Paulson with the mortgage industry, would freeze introductory "teaser" rates on subprime mortgages, preventing them from resetting to higher rates for a period of five years.
President George W. Bush, who was scheduled to announce the agreement after a meeting with industry leaders at the White House yesterday, has stressed that the deal is not a bailout, because no government money is involved.
The effort is aimed at stemming a possible 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, which will add hundreds of dollars to the typical monthly payment.
The mortgage companies will offer to freeze the loans at the lower introductory rates as long as the borrowers have not missed any payments at the lower rate.
The program is the biggest effort yet to deal with a tidal wave of mortgage defaults, which have piled up billions of dollars in losses for big banks, hedge funds and other investors, as well as roiling financial markets around the globe. The defaults are the latest economic blow from the worst housing slump in more than two decades. Some economists believe the housing bust could become severe enough to push the country into a recession.
Two Democratic presidential contenders, Senator Hillary Clinton and former senator John Edwards, complained on Wednesday that given the risks to the economy, Bush's proposal did not go far enough. They put forward their own plans that would not only freeze mortgage payments but also declare moratoriums on further foreclosures for a period of time as a way of adding pressure on lenders to reach at-risk homeowners.
The financial services industry applauded the administration for negotiating a plan that would allow free-market forces to operate.
The hope is that the freeze would buy time for the housing industry to work down record levels of unsold homes and for sales and prices to start rising again.
A housing market rebound would allow homeowners to refinance their adjustable-rate mortgages into fixed-rate loans with more affordable monthly payments.
The big sticking point in the negotiations was getting investors who have purchased the bundled loans to agree to accept lower interest payments.
But officials representing major players in the mortgage industry said they believed the plan would help at-risk homeowners avoid defaulting on their mortgages.
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