Bush's Subprime Rescue Plan Coincides With Sobering Delinquency Report

Several hours before President Bush announced the details of his administrations plans to assist homeowners who are facing foreclosure the Mortgage Bankers Association released its delinquency survey for the third quarter.

The survey showed that the number of loans in the foreclosure process and the number of loans entering that process were at the highest levels since MBA began keeping records 21 years ago.

Loans entering foreclosure - generally those that are 90 days in arrears on payments - represented a seasonally adjusted 0.78 percent of all loans on one-to-four family residences. In the second quarter the rate was 0.65 percent and one year ago it was 0.46 percent.

Loans that are in foreclosure represented 1.69 percent of all loans, an increase of .29 percent since the second quarter and .64 percent since the third quarter of 2006.

As expected, adjustable rate loans (ARMs), especially those classified as subprime, are performing much worse than their fixed-rate and/or conventional counterparts with subprime ARMs making up 43 percent of loans entering the foreclosure process even though they represent only 6.8 percent of the universe of 1-4 family loans. Prime ARMs, those given to credit-worthy borrowers with documented income accounted for 18.7 percent of new foreclosures (they represent 14.5 percent of outstanding loans).

5.59 percent of all borrowers were delinquent on their mortgage loans during the third quarter compared to 5.12 percent in the second quarter and 4.67 percent one year ago. Delinquency is often temporary when homeowners have a one or two month financial crisis or a mortgage check goes missing in the mail. Many 30-or-60-day delinquencies are resolved before the loans enter any type of legal process. Still this was the highest delinquency rate since 1986.

While conventional fixed-rate mortgages continue to perform well in the main, some borrowers are feeling the pinch when they are unable to sell their homes due to the depressed market.

Trend-setting California scored again, although in this case it is not a compliment. The number of subprime ARM foreclosure starts in the state in the third quarter equaled the aggregate of those in 35 other states.

At 1:30 Thursday Bush and Treasury Secretary Henry Paulson held a press conference to announce the details of the foreclosure reduction plan. Bush essentially confirmed the rough outline that Paulson had revealed in a speech before the Office of Thrift Supervision National Housing Forum on Monday. The plan, which was warmly received by many industry leaders attending the conference such as Fannie Mae President Daniel Mudd calls for a five year freeze of mortgage rate increases on so-called teaser rate loans. These are mortgage loans where the introductory rate is artificially low to allow many otherwise unqualified borrowers - unqualified because of their debt to income ratio or unverifiable income - could obtain loans. These teaser rates are set to adjust to market rates after one or two years and often will result in monthly mortgage payments as much as 30 percent higher than the borrowers' initial obligation.

According to many news reports this morning, many lenders and servicers have signed on to participate in the program.

The administration's plans will actually help only a small portion of troubled borrowers. Those who are already delinquent on their loans - whether at the teaser rate or after a reset - are out of luck as are those who are able to pay the loans after rates adjust. This leaves homeowners who are paying as agreed but are facing a reset they won't be able to handle. The number of potential beneficiaries is generally predicted to be about one million homeowners.

At the press conference Bush spent much of his time criticizing Congress for failing to pass a number of mortgage-related initiatives such as his proposal to reform the Federal Housing Administration and bills to reform the tax code to remove short-sale penalties and to encourage programs on the state and local levels to assist borrowers other than first-time homeowners and those buying in distressed areas as allowed by the current code.

Speaking in advance of the Presidents press conference, two Democratic presidential candidates urged more comprehensive efforts. Senator Hillary Clinton, speaking Wednesday at NASDAQ headquarters in New York City accused Wall Street of enabling and encouraging the risky loans that now pose a risk to the economy. She also placed part of the blame on real estate speculators who fueled the rapid increase in housing prices and Wall Street Analysts who gave high ratings to securities backed by subprime mortgages. The Senator had outlined a plan in August to address lending issues and has recently called for a 90-day moratorium in foreclosures as well as a five year freeze on rate changes. Former Senator John Edwards on Wednesday urged a seven-year freeze on interest rate increases.

Clinton also made it clear that lenders should participate in her rescue plan voluntarily or she would consider legislation which would protect mortgage servicers from action by investors when they participate in rate freezes.

There are a lot of problems with the administration's proposals but it is a start and helping one million families is a worthy goal. We will take a closer look at some of the benefits and some of the problems tomorrow.