Bush Mortgage Freeze Plan May Not Fix Anything

By James Donahue

In an obvious attempt to appear as if he is trying to help millions of Americans trapped in the interest rate squeeze that is causing a crisis of bank foreclosures, President George W. Bush proposed a bill that would freeze mortgage interest rates for five years.

While it may sound like a good idea, we perceive this as yet another foolhardy government-sponsored proposal that gives the appearance of doing something for people on the verge of losing their homes when, in reality, it won't do much for anybody.

The proposal, developed by Treasury Secretary Henry Paulson in talks with representatives of "the mortgage industry," would only freeze those introductory "teaser" rates on subprime mortgages, keeping them in check for five years. After that, the rates will adjust to market demands, which may remain high indefinitely.

The plan is designed to help an estimated million people who can afford payments under current rates, but not if the interest rates go higher. That means these people over-extended themselves, thinking that the housing bubble would continue indefinitely, and are already living on the edge of financial disaster.

The best-case scenario would be that the housing industry rebounds within that five-year period. The freeze would give these homeowners time to get their mortgage payments in line and possibly qualify for fixed-rate loans at levels they can afford to pay.

White House deputy press secretary Tony Fratto said the proposal, if approved by Congress, would be voluntary and does not represent federal controls on the private money market. That means banks do not have to comply with the freeze. Many banks, also caught in the tight money squeeze, may choose not to comply. The carrot would be on the stick, however. Compliance would help subprime mortgage holders continue payments, so the bank is not stuck with a lot of real estate when home values are sliding.

President Bush also stressed that the deal will not be a bail-out for homeowners. No government money will be used to keep the banking industry solvent during the freeze.

The proposal was made even as home foreclosures surged across the land. One estimate suggested that some 993,000 U.S. households are presently in the process of foreclosure and that another 2 million families, who purchased on subprime adjustable-rate mortgage agreements, will be facing major increases in interest rates in the next year.

Interest hikes from 7 or 8 percent to as high as 11 percent can add hundreds of dollars to the monthly house payment.

Subprime mortgages are bank loans to borrowers with spotty credit histories. These home buyers did not qualify for fixed-rate home mortgages and were forced to turn to adjustable-rate loans when they bought their homes. As the availability of money tightens, banks are raising the interest on these loans. This is not only affecting the housing industry, but is generating billions of dollars in losses for big banks, hedge funds and other investors.

Some economists worry that the housing bust may become severe enough to push the country into recession.