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American homeowners who took on mortgages they cannot afford will have their interest rates reduced to allow them to stay in their homes, thanks to a plan unveiled by President George W. Bush.
With foreclosures surging to record levels, the controversial plan is aimed at propping up the housing market and limiting the financial losses suffered by mortgage lenders and investors in mortgage-backed securities.
However, the plan could trigger a wave of legal action from those investors, and there was also an angry reaction from many homeowners who have been diligently paying their bills.
"We should not bail out lenders, real-estate speculators or those who made the reckless decision to buy a home they knew they could not afford," Bush said. "The homeowners deserve our help. The steps I've outlined today are a sensible response to a serious challenge."
The voluntary agreement is the culmination of weeks of talks between the Bush Administration, the administrative companies which service the loans, and representatives of the investors who ultimately own the mortgages.
Thanks to the spread of securiti-sation, most mortgages have been sold on by the lenders and parcelled up into derivatives such as mortgage-backed securities and collateralised debt obligations, their ultimate ownership scattered among investors across the globe.
Treasury Secretary Hank Paulson admitted that some of these investors might be angry that the terms of the underlying mortgages are being modified, but pointed out that the American Securitisation Forum, which represents investors, was supportive of the plan.
"The industry standards announced today do not change the nature of the responsibilities in the servicing industry - servicers will continue to modify loans when it is in the best interests of the investors. With the investor community on board and as a clear beneficiary of this approach, the risk of litigation should be manageable."
Mark Adelson, of Adelson & Jacob, said investors would wait to see how the plan is implemented.
"If it is the servicers giving away someone else's money, then that is like stealing and that's horrible. If they are maximising the recovery of the loan, then that is in the loan-holders' best interests. The trouble is we can't tell in advance ... how many people redefault. If investors see modifications happening that are just stupid, then I expect them to react to that."
Until the bursting of the credit bubble this year, millions of Americans were able to take out home loans with low introductory "teaser" interest rates, hoping that they would be able to refinance before the rate reset to a higher monthly payment.
Home foreclosures shot up to an all-time high in the three months to the end of September, the Mortgage Bankers' Association said yesterday, and the number of borrowers who had fallen behind in payments was now 6 per cent.
A Moody's economic report yesterday predicted that house prices would continue to fall while the market was "awash with unsold inventory".
- Independent
