Bush's Phoney Mortgage Relief

[...]

Although Mr. Bush unveiled the plan at the White House on Thursday, its terms were set by the mortgage industry and Wall Street firms. The effort is voluntary and it leaves plenty of wiggle room for lenders. Moreover, it would affect only a small number of subprime borrowers.

[...]

In one curious twist, the plan could eliminate many who have good credit scores or managed to improve their credit scores, because the good ratings would be a sign they do not need help.

“Talk about moral hazard,” remarked Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. “We’ve all told people, don’t go any more deeply into debt. Now we’re saying that people who go more deeply into debt will have an advantage over people who don’t go more deeply into debt.”

The administration’s theory is that there is a “sweet spot” in the market where it makes more financial sense for lenders to offer some relief than it does to foreclose on homeowners.

Most analysts agree there is a sweet spot of some sort. Investors typically lose 40 percent or 50 percent on homes that go into foreclosure, and the cost of shielding borrowers from a big jump in rates can be much less.

“I think there is a sweet spot,” said Bert Ely, a banking consultant in Alexandria, Va. “But I worry that the sweet spot is much smaller than people think it is. And as housing prices continue to decline and debts pile up, I fear the sweet spot will shrink.”

Administration officials estimate about 500,000 subprime borrowers are in danger of losing homes in the next 18 months as their low teaser rates expire and their monthly payments jump by 30 percent or more. Outside analysts warn the number of foreclosures could be much higher.

[...]