Criticism and (Some) Praise for the Mortgage Rescue Plan

Late last week, President Bush announced a new proposal to help troubled homeowners, which included halting increases on many of the adjustable rate mortgages due to reset soon.

The housing crisis is ongoing–and could, if foreclosures keep increasing, greatly affect spending and the national economy. It is clear something needed to be done: But is the mortgage plan the right solution?

Not everyone thinks so. In a letter to Congress last week, 61 economists said they oppose the plan and basically told the government to leave the housing situation alone, Bloomberg reports.

Many members of the government aren’t too keen on the plan, either. BusinessWeek reported that reaction to the proposal was mixed; Democrats felt it fell short, and Republicans saw it as unnecessary meddling in the private sector.

And yet, many mortgage industry members were glad that it was something. Anything. Please.

Given that the mortgage delinquency rate hit a 20-year high last week, according to the Mortgage Bankers Association, one wonders if something, anything, please isn’t just what we need.

Complaints about the plan include:

• It Won’t Help Enough People. To be eligible for the freeze, you must have received your loan between Jan. 1, 2005 and July 31, 2007, and it must be due to reset between Jan. 1, 2008 and July 31, 2010.

Wall Street analysts, according to San Diego Union Tribune columnist Dean Calbreath, estimate that just 7 percent to 20 percent of in-need borrowers will qualify–which means 80 percent won’t. That’s roughly 1.6 million borrowers, enough to still potentially wreak major havoc on the economy.

• It’s Delaying the Problem. The scope of the plan wasn’t Calbreath’s only criticism. Perhaps because San Diego ranks 16th highest out of the country’s top 100 metropolitan areas for defaults and foreclosures, he acutely points out that the plan seems to pause the problem more than stop it. "For the borrowers who do qualify, Bush’s key solution to their subprime mortgage problems is to keep them in subprime mortgages!" Calbreath says. "Once the freeze is over, they’ll have to cope with rising adjustable rates, switch to a fixed rate if they qualify, sell their home or let it be foreclosed upon, which could lead to a second round of the mortgage battle."

• It’s Too Late. Some critics have questioned the plan’s mandate that homeowners who are already in trouble be less than 60 days behind in their payments, saying it will leave too many recent defaulters out in the cold (possibly literally).

And what of the borrowers who just plain got in over their heads? Is this really going to be able to buy them a few years? “We were selling $300,000 homes to people who could only afford $175,000 homes,” Jason Bosch, president of Home Center Realty in California’s hard-hit Riverside County, told The New York Times. “Even if you freeze their payments, they still can’t handle it.”

• It’s  Unclear When It Will Start. About 5,000 Iowa homeowners could get help under the plan; 3,100 of them have already called the homeowner help hotline Iowa Attorney General Tom Miller set up three months ago, according to the Des Moines Register.

However, Miller told the paper last week as the plan was announced that it would be weeks before anyone in the state knew who would meet the requirements for it–prompting him to say it is "a good proposal … but it will only be part of the solution."

No one is arguing the current case-by-case basis system of working things out is fast–but even if setting some guidelines does give lenders a handy process to refer to, since the private sector is running this thing, it’s up to the private sector to get it going–and to embrace the program.

Which is why U.S. Treasury Secretary Henry Paulson said the Fed hopes "that these guidelines will be adopted as reasonable and customary standard practice across the entire servicing industry," according to BusinessWeek.

Yet not everyone dislikes the freeze plan. A New York Times article published Friday cited one reason the proposal has gained some support: Even if the plan ends up delaying the problem for another five years, some building industry members are delighted that it will keep more foreclosed homes from being added to the already bloated housing inventory.

The head of the National Association of Home Builders agrees.

"It’s not a panacea but it’s a step in the right direction," Jerry Howard, NAHB chief executive, told the Chicago Tribune. "From our perspective, keeping 1.2 million homes off the inventory list [of homes for sale] is a major accomplishment."

And for now, in lieu of anything else, we’ll take it.