Bush unveils plan to freeze subprime loan rates

US president George W Bush formally unveiled a plan yesterday to freeze interest rates on some subprime home loans for five years, setting up potential showdowns with mortgage security investors who could see their returns decline and Democrats who say the plan does not go far enough to help troubled homeowners.

The plan, negotiated over a series of meetings with industry executives, is intended to forestall a wave of foreclosures over the next two years as almost $400 billion (€273 billion) worth of home loans made to risky subprime borrowers are reset at higher interest rates.

The introduction of the plan came as the US Mortgage Bankers' Association said US home foreclosures reached a record high in the third quarter, with 1.7 per cent of outstanding loans in the foreclosure process.

The number of Americans who fell behind on their mortgage payments rose to a 20-year high as borrowers were unable to refinance or sell their homes. The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.59 per cent, the highest since 1986, the association said.

The White House said the new plan could potentially help about 1.2 million homeowners.

An estimated 1.8 million homeowners took out loans with low teaser rates but now face expensive loan rate resets in the next year alone, the US Federal Reserve has said.

Under the plan, mortgage servicers would agree to the five-year rate freeze voluntarily. The plan would apply to subprime adjustable mortgage loans taken out between January 2005 and July 2007, with rates to rise between January 2008 and July 2010.

It would apply only to borrowers who had less than 3 per cent equity in their homes and who were either current on their payments or no more than 60 days behind. The rate freeze would not include borrowers able to handle higher payments or those unable to make payments even under their current lower rate.

A Barclays analysis suggested that only 12 per cent of subprime borrowers, or 240,000 homeowners, would be helped by the freeze. Mark Zandi, chief economist for Moody's Economy.com, put the number at about 250,000.

The plan would also seek to switch as many borrowers as possible with subprime adjustable rate mortgages into more sustainable loans. Mr Bush's proposal would identify borrowers eligible for refinancing and fast-track them into new loans offered by the Federal Housing Association (FHA) and private lenders.

The proposal can proceed without legislation but the administration would need congressional approval to raise the size of home loans offered by the FHA.

Democrats criticised elements of the plan. Barney Frank, chairman of the House of Representatives financial services' committee, said it was a "grave error" to screen borrowers based on their credit score as it punished those who have sought to keep their score high. - (Bloomberg)