Bush Aims to Prolong Expansion With Subprime Freeze

Dec. 6 (Bloomberg) -- President George W. Bush today announced a freeze on some subprime mortgage rates in an effort to stop a wave of foreclosures from undoing the six-year expansion.

Treasury Secretary Henry Paulson and regulators forged the agreement with lenders that will fix interest rates on some loans for five years. The deal is focused on borrowers who will fall behind once initially low rates reset to higher levels through July 2010.

"We face a difficult problem for which there is no perfect solution," Paulson said at a news conference in Washington. "The current system for working out those problem loans would not be sufficient to handle the anticipated 1.8 million owner-occupied subprime mortgage resets that will occur in 2008 and 2009."

The housing slump, now in its third year, is pushing home values down and restraining economic growth, which economists estimate will be less than 1 percent this quarter. The collapse in the market for securities backed by subprime mortgages cost the chief executive officers of Merrill Lynch & Co. and Citigroup Inc. their jobs, roiled markets from Auckland to New York and forced the Federal Reserve to cut interest rates twice.

The agreement addresses homeowners unable to afford higher interest rates once starter rates increase, and offers help in one of three ways, a White House official said. The options are freezing rates or refinancing into either a new private mortgage or a Federal Housing Administration-backed loan, he said on condition of anonymity.

The measures may help more than 1 million subprime borrowers avoid foreclosure over the next two years, the official said.

"There are a couple of problems with it,'' Frank, a Massachusetts Democrat, said at a hearing on housing today. It's a ``grave error that there's a cutoff at a 660 FICO score," he said. That penalizes those who struggled to maintain good credit profiles, he said. Frank also faulted the plan for failing to address the penalty for prepaying many subprime mortgages.

"My biggest concern is that there are a lot of Americans who are making their mortgage payments, they are current, and the benefit won't go to them," Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, told reporters after a meeting with Paulson yesterday.

One challenge has been to craft a deal minimizing lawsuits from investors in bonds backed by the mortgages being rewritten, analysts said. The longer that lower rates are extended, the more risk posed to the bonds' values. Republican Representative Mike Castle of Delaware has proposed legislation offering a "safe harbor from legal liability" to mortgage servicers.

'Be Careful'

"The things that make the U.S. mortgage market the capital-market success that it is are property rights and the sanctity of contracts, so they have to be careful to not damage either one of those," said Scott Simon, head of mortgage- and asset-backed bond investing at Pacific Investment Management Co.

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