President Bush announced this week plans for a five-year freeze on interest rates for subprime mortgages.
“We should not bail out lenders, real estate speculators or those who made the reckless decision to buy a home they knew they could never afford,” Bush said. “But there are some responsible homeowners who could avoid foreclosure with some assistance.”
Bush said 1.2 million people could be eligible for help. But only a fraction will be subject to the rate freeze. Others, he said, would get assistance in refinancing with their lenders and moving into loans secured by the Federal Housing Administration.
Dr. James Gaines, research economist with the Real Estate Center at Texas A&M University, calls the plan a noble effort to find a way to keep homeowners in their homes but says the basic premise is shaky, and the details are sketchy.
“For the most part, the homeowners and borrowers likely to benefit from the interest rate freeze are the very same people who would have the best chance of renegotiating their loans with the lender in the first place — a borrower with a relatively sound credit rating and a history of making payments who simply needs a little help to keep from going into full default,” Gaines said.
Bush’s announcement followed news from the Mortgage Bankers Association that the percentage of mortgages that started the foreclosure process during the third quarter jumped to 0.78 percent, a record high. In addition, the delinquency rate for all mortgages climbed to 5.59 percent during the third quarter, the highest since 1986.
Gaines said Texas borrowers — even subprime borrowers — are in better shape than those in the seven states dominating the delinquency and foreclosure statistics, because home prices here continue to rise, making selling or refinancing a viable alternative.
Source: Real Estate Center