(Read more on the debt and equity markets.)
WASHINGTON, DC-In response to the worsening subprime mortgage crisis, President George Bush has unveiled a plan that he says will help as many as 1.2 million homeowners. The scenario he outlined in a press conference Thursday hinges on a deal between banking regulators and lenders to freeze interest rates on certain subprime mortgages for five years. Bush announced his plan the same day that the Mortgage Bankers Association reported that nearly 6.6% of Americans have fallen behind on their loan payments--a 20-year high.
In his speech, Bush outlined a few of the measures his administration has taken to stem the defaults. These included a new initiative at the Federal Housing Administration called FHA Secure and the formation of a public-private sector group called HOPE NOW Alliance.
"Representatives of HOPE NOW just briefed me on their plan to help homeowners who will not be able to make the higher payments on their subprime loan once the interest rates goes up--but who can at least afford the current, starter rate," Bush said in his address. "HOPE NOW members have agreed on a set of industry-wide standards to provide relief to these borrowers in one of three ways: by refinancing an existing loan into a new private mortgage, by moving them into an FHA Secure loan, or by freezing their current interest rate for five years.
"Lenders are already refinancing and modifying mortgages on a case-by-case basis," he said. "With this systematic approach, HOPE NOW will be able to help large groups of homeowners all at once. This will bring more relief to more homeowners more quickly. HOPE NOW estimates there are up to 1.2 million American homeowners who could be eligible for this assistance."
Not surprisingly given the complexities of the subject and the relatively small number of people helped by it, the real estate industry's opinion on the plan ranges from taking a wait and see approach, to supporting it to outright opposing it. Scott Tross, partner with New York City-based law firm Herrick, Feinstein who represents buyers and sellers of distressed commercial debt tells GlobeSt.com that the plan will likely help stabilize the debt markets, which will in turn lead to a quicker return to normal market conditions. "The uncertainty in today's markets is forcing lenders to be overly cautious," he notes. "Once the markets stabilize, the commercial markets can go back to business as usual. Because commercial property values have risen so far so fast, it is unlikely that substantial price appreciation will continue. But at least property values won't drop."
Tony Graziano Jr., managing director of the New Jersey office of Integra Realty Resources, tells GlobeSt.com that the markets are already in caution mode and it is unlikely that the plan will reverse that stance. Also, "I am curious under what authority the president has to enforce a private sector interest rate squeeze." That said, he continues, the plan could help the situation on the margins by leading to better stability.
Stan Ross, chair of the University of Southern California Lusk Center for Real Estate also think the plan has some merits--but will not move the clock back to spring 2007. "It is like chicken soup," he tells GlobeSt.com, "it won't hurt you any and could possibly help. My concern is that it will get hung up bureaucratically."
Critics of the plan, though, say that the market is working out the excesses already and that federal intervention could hinder this process as well as restrict credit to subprime borrowers over time. That was the contention by 61 economists from universities and think-tanks that, in conjunction with the non-profit advocacy group FreedomWorks, released an open letter to the US Congress advising against "excessive new regulations or federal interventions" to deal with credit repricing in the subprime mortgage market. "Access to such mortgages has provided more benefits than harm to consumers, and through market discipline, lending institutions are taking the necessary steps to address the problems that have emerged," the signatories to the letter wrote.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
