Merits of New Mortgage Aid Are Debated; Critics Say Treasury Plan Won't Bring Long-Term Relief
The U.S. Treasury said yesterday that its mortgage-assistance initiative helped 45,000 distressed subprime homeowners get new loans in its first month, but a veteran mortgage banker who helps run the program said many of them may not receive long-term relief and could ultimately face higher total costs.</br></br>While some borrowers stand to benefit from a temporary reduction in their interest rates, others may not, instead being given loans that just allow them more time to repay their debt, said Bill Longbrake, a senior policy adviser for the Financial Services Roundtable lobbying group and vice chairman of Washington Mutual. The latter group of delinquent homeowners could face additional charges and late fees for missing payments. Only a very small group of borrowers could get their mortgage principal reduced outright, he said.</br></br>When the Bush administration announced the effort last year, officials said they were offering a long-term solution to a growing foreclosure crisis. The program, which is being run by a Treasury-brokered alliance of lenders and nonprofit groups that calls itself Hope Now, offers loan modifications to subprime mortgage holders whose interest rates have jumped in the past year, granting them a five-year rate freeze so they can work out new terms with their lenders.</br></br>But financial firms have been reluctant to offer generous loan modifications because they have to consider the returns of the investors who buy mortgages and provide the crucial financial backing for the loans, Longbrake said.</br></br>"A mortgage servicer's obligation is to get the maximum value to the investor over the life of the loan," he said. "If you are going to modify the loan and keep the borrower in the house, the bias is to do that for a shorter rather than longer period of time. . . . There's a reluctance to do long-term modifications."