The Star-Ledger

Throwing Homeowners A Lifeline

President's proposal aims to fend off foreclosure for those hurt by adjustable-rate mortgages

The Star-Ledger — Saturday, September 1, 2007

BY GREG SAITZ
Star-Ledger Staff

It wasn't quite a Bill Clinton "I-feel-your-pain" kind of moment, but President Bush yesterday described steps the federal government will take to help homeowners facing foreclosure.

The president's comments at the White House marked the administration's first attempt at dealing with the widening subprime mortgage crisis. More and more homeowners with adjustable-rate mortgages in New Jersey and across the country find themselves unable to keep up with payments and are in jeopardy of losing their houses.

Bush sought to calm the turbulent waters by outlining measures the government will take and urging Congress to step in as well.

"This means that many families who are struggling now will be able to refinance their loans, meet their monthly payments and keep their homes," Bush said.

At the same time, Federal Reserve Chairman Ben Bernanke also tried to tamp down uneasiness, saying yesterday that the central bank will "act as needed" to prevent the credit crisis washing over Wall Street from leaking into the national economy.

Reaction to the president's proposals were mixed.

"The idea of focusing in on those folks who really are hurting and need the help makes a lot of sense," said E. Robert Levy, executive director of both the Mortgage Bankers Association of New Jersey and the New Jersey Association of Mortgage Brokers.

However, many Wall Street analysts, investors and Democrats did not expect Bush's plan to make much of an impact.

"I haven't seen the details, but it seems like a fairly tepid response," said New Jersey Gov. Jon Corzine, a former top Wall Street executive. "It's a mini-step in the right direction, but doesn't do enough to get to the source of the problem."

Here are the highlights of what Bush said and what he didn't say.

THE PROBLEM

Many people, with both good and bad credit, were put in mortgage loans with adjustable rates that start out with low interest, then bump up to a higher rate after a few years. The result is some homeowners took out bigger loans than they could afford, hoping a rising housing market would let them refinance later on.

"Others may have been confused by the terms of their loan or misled by irresponsible lenders," Bush said. Now, many homeowners are falling behind.

The president acknowledged the problem is complicated and will take time to resolve, but said it does not pose a serious threat to the economy.

"This process has been unfolding for some time and it's going to take more time to My play out," Bush said. "As it does, America's overall economy will remain strong enough to weather any turbulence."

WHAT BUSH DIDN'T SAY

The president's comments and proposals were meant to reassure homeowners not bail out speculators who made ill-advised bets on the housing market.

"The government's got a role to play, but it is limited," Bush said. "A federal bailout of lenders would only encourage a recurrence of the problem."

At the same time, he wants government agencies to pursue deceptive lenders and other unscrupulous operators in the industry whose actions helped fUel the problems. As for the financial markets, volatility could be the word of the day for some time as the scope of the credit crisis continues to reveal itself.

THE SOLUTION

The president proposed three specific steps to help ease the burden overstretched borrowers.

Expand the type of loans the Federal Housing Administration insures.

Those who have good credit histories but are behind on their mortgage payments will be allowed to refinance to loans with better rates that are insured by the FHA. Bush also urged Congress to modernize the agency so more homeowners could qualify for the insurance it offers.

"It appears for the first time the FHA will look past people's credit and come up with products useful for folks," said Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action.

Ask Congress to reform a key housing provision of the federal tax code that penalizes homeowners who refinance their loans or whose homes are foreclosed on.

The president noted that under the existing law, if a home's value declines and, say, $20,000 of the homeowner's loan is forgiven by the lender, the IRS treats that amount as taxable income.

Launch an initiative to help struggling homeowners find a way to refinance their mortgages.

That means having the government reach out to groups that help homeowners in this situation and look for ways to expand mortgage financing options, identify at-risk homeowners before they get behind on their loans, and explain the alternatives available.

The Associated Press and Reuters contributed to this report.

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