Bush Plan to Stablize Housing Market

NAHB Nation’s Building News, Dec. 10, 2007

A plan announced last week by President Bush to limit foreclosures by working with key mortgage lenders and investment firms to freeze interest rates for five years on certain subprime mortgages will help set the stage for the industry recovery that is expected to materialize next year.

“The administration’s plan to help struggling borrowers stay in their homes is one of several steps that can help stabilize the housing market and reassure consumers and investors in the mortgage market,” said NAHB President Brian Catalde, a homebuilder from El Segundo, Calif. “We applaud this action and urge Congress to follow up quickly on pending legislation that would provide additional help in easing the credit crunch and restoring confidence in the marketplace.”

Specifically, Catalde called on Congress to:

* Enact FHA reform legislation to allow the agency to insure more home loans and help subprime borrowers.
* Strengthen regulatory oversight of Fannie Mae and Freddie Mac and allow them to purchase mortgages in high-cost markets.
* Enact legislation that eliminates taxes on mortgage debt that is forgiven as part of a loan workout.

The Bush plan to stave off foreclosures, which emerged from discussions with various groups including lenders, builders, investors, consumer activists, housing economists and regulators, is aimed at borrowers with loans that were originated between Jan. 1, 2005, and July 31, 2007, with rates that are scheduled to reset between Jan. 1, 2008, and July 31, 2010.

Homeowners with steady incomes who have been making timely payments on their mortgages but who cannot afford the higher adjusted rate could qualify for a freeze of up to five years on their current interest rate if they meet certain conditions. They could also be placed on a fast-track approach that would enable them to refinance or modify their loans. To ensure that the break is not granted to real estate speculators or investors, the plan would only be available for owner-occupied homes.

Treasury Secretary Henry Paulson said that the private-sector effort to develop a market-based approach to avoid foreclosures was needed because “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 investors who own these loans recognize that foreclosure is costly and that a workout plan or mortgage modification often brings them greater value than foreclosure,” Paulson said. “But the standard loan-by-loan evaluation process that is current industry practice would not be able to handle the volume of work that will be required. Instead, the industry needed a streamlined approach to address this increased volume.”

Paulson said that the initiative was not “a silver bullet” and indicated that the administration would continue to pursue other opportunities to address the housing downturn.

Separately, a UCLA Anderson Forecast study last week concluded that the U.S. and California economies will weather the housing downturn without a national recession, and a report from Harvard said that even with today’s excess supply of unsold homes on the market, the underlying demand for new housing will ultimately rebound to robust levels through 2014 (click here for a related story in this issue).

“The basic market fundamentals for housing are still very strong,” said Sandy Dunn, NAHB president-elect and a builder from Point Pleasant, W.V. “Once we work down the inventory of unsold units and put the credit crunch behind us, demand among both first-time and trade-up buyers will return to more normal and sustainable levels.”