By Alison Vekshin and Christopher Anstey
Dec. 6 (Bloomberg) -- President George W. Bush today announced an interest-rate freeze for subprime borrowers that Democrats said didn't go far enough and Standard & Poor's warned may lead to lower ratings on some mortgage bonds.
Bush said the plan, negotiated by Treasury Secretary Henry Paulson and other regulators with mortgage lenders, may help as many as 1.2 million Americans keep their homes. The agreement, which touched off a rally in builders' stocks, is aimed at borrowers who can't afford their mortgages after they reset higher from low starter rates.
``It's a small step in the right direction,'' said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies in Cambridge, Massachusetts. The plan may help about 15 to 20 percent of subprime borrowers, he estimated. ``It is an important band-aid but the arm is hemorrhaging.''
Bush spoke hours after the Mortgage Bankers Association said homeowners fell behind on their mortgage payments at the highest rate in more than two decades last quarter. S&P said later that, by fixing rates at lower levels, the agreement will hurt the value of securities backed by mortgages.
``We face a difficult problem for which there is no perfect solution,'' Paulson said at a news conference in Washington. ``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.''
Stocks of financial companies and builders rose. Countrywide Financial Corp. and Fannie Mae rallied, while Lennar Corp. and D.R. Horton Inc., the biggest homebuilders, led a gauge of construction companies to its biggest advance ever. The Standard & Poor's 500 Index added 22.33, or 1.5 percent, to 1,507.34 at the close in New York.
The housing slump, now in its third year, is pushing home values down and restraining economic growth, which some economists estimate will be less than 1 percent this quarter.
Because lenders are making it tougher to get loans, refinancing won't be an option for some homeowners, and delinquencies will probably rise, Federal Reserve Governor Randall Kroszner said at a congressional hearing today.
The share of all home loans with payments more than 30 days late rose to 5.59 percent, the highest since 1986, the MBA said today.
Still, Fed Chairman Ben S. Bernanke said in a statement in Washington that the agreement announced by the administration was a ``welcome step.'' The Fed chief separately has pledged to announce new proposed rules to curb abusive lending practices in the $10.4 trillion residential mortgage market this month.
Bush said in a statement at the White House, accompanied by Paulson and Housing and Urban Development Secretary Alphonso Jackson, that ``the housing market is moving through a period of change'' and foreclosures would hurt the economy.
The plan was announced under the rubric of Hope Now, an alliance of banks and financial-industry lobbyists, including Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. The three banks represent about 18 percent of all subprime adjustable-rate mortgage servicers, Comptroller of the Currency John Dugan said in an interview today.
The agreement offers help in one of three ways: freezing rates, refinancing into a new private mortgage, or obtaining a loan backed by the Federal Housing Administration.
Borrowers who have rates scheduled to adjust between January 2008 and July 2010, who are current on their payments and no more than 60 days late in the past year, qualify for the deal, Hope Now said in a statement. Homeowners unable to afford the new payments ``could have their rates frozen at the introductory rate for a period of five years.''
Subprime mortgages are usually given to people with poor or incomplete credit histories. Adjustable-rate subprime mortgages usually begin with 7 percent to 9 percent rates that reset to between 11 percent and 13 percent, John Reich, director of the Office of Thrift Supervision, said in an interview Dec. 3.
House Financial Services Committee Chairman Barney Frank said he told Paulson today that he was concerned the agreement cuts off borrowers with higher credit scores.
``There are a couple of problems with it,'' Frank, a Massachusetts Democrat, said at a hearing on housing today. It's a ``grave error that there's a cutoff at a 660 FICO score,'' he said. That penalizes those who struggled to maintain good credit profiles, he said. Frank also faulted the plan for failing to address the penalty for prepaying many subprime mortgages.
Most U.S. banks use FICO credit scores, a product of Minneapolis-based Fair Isaac Corp., to judge a borrower's ability to repay loans. Borrowers with higher FICO scores usually qualify for lower interest rates on their mortgages.
Foreclosures almost doubled in October from a year earlier as subprime borrowers failed to make higher payments, Irvine, California-based RealtyTrac Inc. said Nov. 29. Credit Suisse Group analysts project 775,000 homes with $143 billion of mortgage debt will go into foreclosure in the next two years.
``I wish he would have started this process'' sooner, said Democratic Representative Maxine Waters of California. ``It's only going to help a very, very small number of people.''
One challenge to the deal is minimizing lawsuits from investors in bonds backed by the mortgages being rewritten, analysts said. The longer that lower rates are extended, the more risk posed to the bonds' values.
``Standard & Poor's supports appropriate loss mitigation strategies to prevent foreclosures and allow subprime borrowers to remain in their homes,'' the unit of McGraw-Hill Cos. said in a report. ``In certain instances, the negative effects may outweigh the positive benefits,'' S&P said.
Republican Representative Mike Castle of Delaware has proposed legislation offering a ``safe harbor from legal liability'' to mortgage servicers.
``I'm worried that lawsuits will stall or stop modifications,'' he said at today's hearing.
Paulson called the risk of litigation ``manageable'' and said today's announcement isn't the final step. ``The administration is still formulating what a complete policy response should be'' to the housing slump, he said.
The Treasury chief said he led a two-hour meeting yesterday of the President's Working Group on Financial Markets. The group includes Bernanke and the heads of the Securities and Exchange Commission and Commodity Futures Trading Commission.
``I don't think it will stop price declines but it will help,'' said Robert Shiller, chief economist at MacroMarkets LLC in Madison, New Jersey, and a professor at Yale University. ``We are embarking on what might be the biggest decline since the Great Depression.''
Shiller estimated more than $1 trillion of housing wealth has been erased so far, with more to come.