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Experts predict Bush plan will have modest impact on mortgage market's credit crunch

Experts predict Bush plan will have modest impact on mortgage market's credit crunch

President George W. Bush's plan to help financially struggling homeowners likely will have a modest impact on a worrisome global credit crunch, economists said Friday.
The White House's proposal _ to have a government agency created during the Great Depression to insure mortgages assist homeowners at risk of default _ is symbolic more than substantive, says Nigel Gault, chief economist at Global Insight.
Expanding the activities of the Federal Housing Administration "makes it clear that the federal government is going to do something," Gault said. "How much it will ultimately do is not clear."
The Department of Housing and Urban Development estimates the plan will allow 80,000 homeowners to refinance into lower-rate loans over the next year.
That is less than 1 percent of the estimated 2 million homeowners research firm RealtyTrac estimates will foreclose in 2007.
The change affects a "fairly limited number of the troubled households," said Celia Chen, director of housing economics at Moody's Economy.com.
The new FHA Secure program would offer government-guaranteed loans to mortgage-holders in default because they could not afford to keep up payments after interest rates on their mortgages reset at much higher levels.
FHA currently insures 3.7 million loans, many of which were made to low-income borrowers with risky credit although this will be the first time the FHA backs loans for borrowers in default.
However, only borrowers who made monthly payments on schedule before the rate resets kicked in will be eligible for the new loans, the FHA said, bringing "much-needed liquidity to the mortgage market."
Experts said most homeowners confronting financial woes likely would not meet that criteria, which also requires income verification of the ability to make payments and a down payment of at least 3 percent.
That will not help borrowers who are already in over their heads, including those with weak credit who were able to get so-called "liar loans" because the income stated on their loan applications was never verified, says mortgage industry consultant Brian Chappelle.
"Any borrower whose income was not properly stated, this is not going to help them," Chappelle adds, noting that the FHA is required by law to maintain financial solvency. The agency is "not a subsidy program."
Just as challenging for troubled mortgage-holders, the FHA Secure loans require a new property appraisal and approval from the current holder of the mortgage.
Property values have dropped as the housing slump worsened. If the value of a home has declined significantly, major lenders may be reluctant to sign off on a new loan because they would take the financial hit of the difference in value between the new and old loans. However, there is some incentive to assess whether it would be better to take that hit than have a loan that forecloses.
Still, "for the lender, (this program is) not a bailout," Chappelle said.
The FHA is also pushing to increase the maximum amount it can insure on a loan to $417,000 (euro304,268), up from $362,790 (euro264,713).
Many lawmakers support the idea, saying that allowing FHA to insure more mortgages would help the riskiest borrowers buy homes or refinance unaffordable loans at a time when available credit is getting harder to find.
Part of the credit shortage can be traced to the so-called secondary market for mortgages, which has seized up in recent months, experts say.
In the past two decades, trillions of dollars worth of mortgages were bundled and sold as securities to institutional investors. In theory, the securities spread the credit risk of the mortgages, making more money available for lending to home buyers.
However, as problems in mortgages increased this year, especially in subprime loans made to borrowers with weak credit, the value of mortgage securities backed by those loans plunged.
As the housing market's woes have grown, Democrats have called for Fannie Mae and Freddie Mac, government-sponsored public companies that account for two-thirds of the multi-trillion dollar market in mortgages and mortgage-backed securities, to take on more debt. The administration has resisted calls to do so.
Default rates at Fannie and Freddie are very low, and Democrats argue that raising both caps would help add liquidity to the mortgage market. However, the White House has said it is opposed to allowing Fannie and Freddie to become even more dominant in the mortgage market.
Bush's plan unveiled Friday suggests FHA loans be sold to Ginnie Mae, a federal housing finance agency, which has government guarantees on the mortgage-backed securities it offers investors.
Democrats also want to raise the $417,000 (euro304,268) limit on the size of loans that the two mortgage giant enterprises can buy from lenders or resell to investors.
Bush's plan was announced the last week before Congress returns to Washington and one of its first priorities, experts predict, will be to decide whether legislative action is needed to help the ailing mortgage market.
Turmoil in the mortgage industry increased earlier this year, when mortgage lenders like New Century Financial Corp. and H&R Block Inc.'s Option One Mortgage Corp. unit reported a jump in the number of borrowers missing payments on home loans.
Major financial market selloffs followed, leading many Wall Street banks to pull back from mortgage lending. As investors and lenders fled the market, mortgage rates spiked, credit tightened and more than 50 lenders filed for bankruptcy. A number of funds invested in mortgage securities also went belly up.


Updated : 2021-05-07 20:45 GMT+08:00