With 2 million foreclosures predicted over the next two years, the plan announced by President Bush for targeted loan modifications for some subprime borrowers is a positive, but very limited, first step.
CRL estimates the President's plan will only help about 7% of subprime borrowers—about 145,000 families—because of the program's limited scope. For example, the plan does nothing to help hundreds of thousands of subprime borrowers who received "exploding" 2/28 adjustable-rate mortgages in 2005 (because these will have reset before the effective date of this plan) and those who have fallen behind because the interest rates on their loans have already reset to unaffordable levels. In addition, the plan will not cover "payment option" ARM loans, which are not typically considered subprime loans but also face significant rate resets in 2008 and beyond.
The plan relies on voluntary decisions by individual mortgage servicers and investors, does not remove the strong financial and legal incentives servicers have to foreclose on loans rather than modify them, and ignores the obstacles to modification posed by "piggyback" second mortgages. Recent experience shows that the likelihood of widespread modifications is small under this "business as usual" approach: Major lenders and servicers have repeatedly committed to modifying loan terms to help borrowers avoid foreclosure, yet a Moody's Investors Service study found that servicers had only modified approximately 1% of resetting subprime loans through July 2007. Finally, the plan lacks a reporting mechanism to provide accountability that, this time, servicers are living up to their commitments.
In light of the plan's limited impact on the foreclosure crisis, it is imperative that Congress also enact a tweak to the bankruptcy code, which will help as many as 600,000 struggling families keep their homes.
Finally, the President's plan does nothing to address the reckless lending and market incentives that created the subprime foreclosure crisis in the first place. Since Treasury Secretary Paulson has called widespread refinancing of subprime loans "the first, best option", it is imperative that common-sense rules be in place to protect struggling subprime borrowers from being put into yet another bad loan. Similarly, these refinances should not result in borrowers losing thousands of dollars apiece in home equity because of prepayment penalties on their original loans.
For more information: Kathleen Day at(202) 349-1871 or firstname.lastname@example.org; Sharon Reuss at (919) 313-8527 or email@example.com; or Ginna Green at (510) 379-5513 or firstname.lastname@example.org.