Bush Unveils Mortgage Crisis Plan

ALEX CHADWICK, host:

From the studios of NPR West, it's DAY TO DAY. I'm Alex Chadwick.

ALEX COHEN, host:

And I'm Alex Cohen.

President Bush presents a new deal today to help homeowners who face soaring mortgage payments. The White House has convinced lenders to voluntarily freeze rates on many subprime mortgages.

CHADWICK: This deal is supposed to prevent some adjustable rate mortgages from resetting to higher rates for five years. We're going to spend the first part of today's program focused on this deal. President Bush is going to formally unveil details at the White House later today.

But for more on this right now, we're going to turn to Bob Moon of MARKETPLACE. Bob, welcome to the show at this time.

BOB MOON: Well, thank you.

CHADWICK: It - it - this is not a bailout for everybody with an adjustable mortgage, is it?

MOON: Actually, not even close. This is not going to apply to everybody. It's supposed to help only those who need help. So it could mean that two next door neighbors who moved in at the same time and might even have gotten their loan from the very same place, well, they could end up having to pay different interest rates. Some will be allowed to stay at the teaser rate - the lower rate - but some will see their mortgage payments go up as scheduled. It will depend on their income, on their ability to pay.

In order to qualify for the plan that was worked out by the Bush administration, a homeowner is going to have to be current on their mortgage and the lender will take a look at their income to decide if they really can't afford to have their interest rate reset, or go up, if you will.

And you asked whether this is a bailout. Well, the Bush administration has already stressed that this isn't a bailout. It points out that no government money is being used here. This is a voluntary remedy agreed to by the mortgage industry.

CHADWICK: Well, but for the mortgage industry, the interest rates that they charge are scheduled to reset or go up on these subprime mortgages in the next couple of years, aren't they?

MOON: That's right. The industry estimates as many as two million subprime mortgages are scheduled to go up over the next couple of years, most in the next year and a half. They could jump from around seven or eight percent to as high as 11 percent; that would be an increase of 30 percent or more in monthly payments when these teaser rates expire.

CHADWICK: So, do you - can you tell from what you know about this deal at this point if it's going to be enough to fix the substantial problem we have with mortgage foreclosures in this country?

MOON: Well, from the peak we've seen so far, some experts don't think so. They think the wave of foreclosures that we've been seeing is going to keep growing. A lot of homeowners are already behind in their payments. They wouldn't qualify for this program. And we're already hearing complaints from Democrats on Capitol Hill and in the presidential campaign that this plan just doesn't go far enough.

CHADWICK: So the - how is Wall Street? What's happening on the market at this point?

MOON: Yeah. It's been causing some big problems on Wall Street, as you know, for many months now. Well, the stock market opened higher today. For the most part, anything that might help head off a wider economic crisis is good news for Wall Street, although there is a bit of irony here. For those investors who've taken what are known as short positions on the mortgage - mortgage industry, essentially they've bet that the problem is going to get worse and financial stocks are going to decline even further. Well, if this action prevents that from happening, they're going to lose money on the deal if they end up seeing the market stabilize or at least not get as bad as they bet it will.

CHADWICK: Okay. Bob, we're going to be following this story throughout the day and you'll hear more this afternoon on NPR's ALL THINGS CONSIDERED. Bob, I also think it's a safe bet what the lead story is going to be later on MARKETPLACE.

MOON: You can guess, yeah.

CHADWICK: All right. Thanks so much.

Bob Moon of public radio's daily business show MARKETPLACE produced by American Public Media.

COHEN: In Denver, Colorado, a town with one of the highest foreclosure rates in the country, the news of the president's plan has raised a lot of questions.

Zach Urban is a housing counselor there and he mans a hotline for troubled homeowners. Lately he's been flooded with calls and he was kind enough to take ours too.

Welcome to the program, Mr. Urban.

Mr. ZACH URBAN (Housing Counselor): Thank you for having me, Alex.

COHEN: What kind of questions have people been calling in with there lately?

Mr. URBAN: Well, the biggest question is what do I do now? How did I get out of the situation? What is the Bush administration going to do? How is this going to affect me as a homeowner? If I have an adjustable rate mortgage, does that mean my loan is going to be frozen, so to speak? And so a lot of these questions we're still waiting to be answered for us. But the main answer to a lot of these questions is, let's call your lender right now and let's get some options on the table and start working on this issue together.

COHEN: And do you have any sense of how many people - how many of the clients that you talked to might actually be affected or helped out by the president's plan?

Mr. URBAN: What I'm looking at with regard to the administration getting involved, as well as Secretary Paulson, is not so much this particular plan but the idea that lenders are willing to cooperate with borrowers, with communities. And so while freezing of interest rates may help a portion of people - I would say probably 20 percent - the bigger ticket here is related to the fact that lenders are now going to be working more closely with those who have seen this coming a long way's out.

And so that's the exciting part of this, for us at least, but we do definitely have some concerns about how this freezing of interest rates is going to affect everybody moving forward, whether it be first-time homebuyers, the general real estate market and the like.

COHEN: And for people who are calling in that may not be able to be helped out by this plan, what advice do you have for them?

Mr. URBAN: Well, my advice is that there's many options, and freezing of interest rates may be one of many options out there. And there are difficult options that involve leaving the property, but those would be obviously the last resort a mortgage community is going to look at. And from our perspective, being an independent adviser, we would want to make sure that we've exhausted all other avenues before we discuss those more difficult decisions of deciding to end the home ownership experience at this time and getting back up into it later on.

COHEN: I imagine that a lot of homeowners there have heard, you know, these words rate freeze, and they think, oh, phew, I'm going to be okay. But ultimately, is a rate freeze going to be the best option for everyone?

Mr. URBAN: I think this is what the treasury secretary and the administration is taking a close look at, is that when you talk about freezing interest rates, you need to take into consideration there's three different types of borrowers out there with adjustable rate mortgages: those for whom an adjustable rate mortgage isn't going to affect them whatsoever because they have the income to cover that change in their mortgage payment; those that no matter what happens with that adjustable rate mortgage, they're still not going to be able to pay the mortgage because their income has been diminished; and then the more appropriate group that they're focusing on at this point, are those for whom the freezing of the adjustment is going to work out the best for them - meaning that this five-year term they're speaking about is enough time for them to get squared away on all their other financial issues and then be able to look at this again in five years.

But for others, it's just putting a Band-Aid on a very long-term situation, and that's not the most appropriate option.

COHEN: Zach Urban is a housing counselor with Brothers Redevelopment in Denver, Colorado. Thank you.

Mr. URBAN: Thank you for having me.

CHADWICK: Listen to this, Alex. Not everyone likes the president's plan to freeze mortgage rates. You're going to hear from someone - Andrew Gerber(ph). He's an engineer. He lives in Denver. He bought his home a decade ago. He signed for a 15 year mortgage with a five percent interest rate; that's pretty good. He says he does sympathize with those who were taken advantage of by predatory lenders, but he does not feel for everyone.

Mr. ANDREW GERBER (Engineer): I think it's difficult to say to somebody, you have to loose your house. But then what about me, for instance, or a friend of mine who might have a six and a half percent 30 year fix that made the right choice at that time? Shouldn't they get a point or two off their current mortgage? I mean where is their money? You know, I mean they made the right decision and they're - they don't get anything. Someone made the wrong decision and they get - they get a handout.

CHADWICK: So there's one angry homeowner.

We're joined now by Larry Litton. He's president and CEO of Litton Loan Servicing. That's a company that manages the money that you send in for your mortgage. They pay the taxes. They make sure the bank gets its money. They service mortgage loans.

Larry Litton, welcome to DAY TO DAY. And tell me, how would you respond to that homeowner you just heard?

Mr. LARRY LITTON (Litton Loan Servicing): This is a point of time that we have a very difficult situation we have to deal with. We have rising delinquencies nationally. We have rising foreclosures nationally. I think we all recognize that foreclosures are very bad. They're bad for homeowners, they're bad for communities, and they're bad for property values for people that are able to, you know, make their mortgage payments.

And this is not about bailing out homeowners. Here's what this is about. This is about trying to take a situation where you have people that are struggling to make their payment; some people may not have fully understood the type of loan product they were getting into. Some people may have perfectly understood the type of loan product that they were getting into. But we have a situation where we have foreclosures that are going unchecked in many areas of the country. And those people that are able to make their payment are being adversely affected by these foreclosures because what happens is these foreclosures destroy the communities where they're located. It actually robs property value from everybody.

CHADWICK: So it's bad for the community.

Mr. LITTON: It's bad for the community.

CHADWICK: How many loans are you managing right now in your company?

Mr. LITTON: We service about 350,000 mortgage loans.

CHADWICK: How many of those do you think are in default or in danger of going into default?

Mr. LITTON: Well, out of these 350,000 loans in this market right now, we have about 25,000 of those loans are in some stage of foreclosure right now.

CHADWICK: Let me ask you about the business, because when I first hear about this, I think to myself someone has got a mortgage business based upon the idea that they're going to lend out money at a very low rate and then they're going to get a higher rate later on. I mean, that's their business plan, and now we're saying, okay, you're halfway into that; you're into the unprofitable part of that, and you're not going to get to go to the profitable part.

Mr. LITTON: Investors that invest in mortgage-backed securities understand that whenever they invest in these securities, that they are expecting a certain percentage of loans to go into default and then you take a loss on those loans. If the percentage of loans that goes into default is higher that what you expected and the losses are higher than what you expected, you end up actually losing more money in the long run.

So the argument is, if I can keep someone in their home and keep them in their home at a lower interest rate, do I end up reducing losses longer term? And that's the argument that we would make in terms of saying that loan modifications are a good thing if responsibly done.

CHADWICK: What is the big lesson coming out of this for the housing industry, the mortgage industry, the banking industry and the mortgage servicing industry of yours? I mean, are we going to be doing things differently five years from now because we've actually learned something from this?

Mr. LITTON: I think that's exactly right. I think what we've learned is that, you know, this is a great country where people deserve second chances. And we've created an environment and an industry where we can provide second chances to people that have troubled credit. But the lesson learned is that you have to do that in a responsible way, okay?

You can't provide a 100 percent financing, no documentation on their income, to people that have demonstrated a past inability to be able to pay their bills on time. I think the great lesson learned is, is that if you're going to provide second-chance opportunities, you have to do it in a way where people have skin in the game, to where they actually put money down, where we have responsible, very well-defined loan products where people really know what they're getting into. I think that's the great lesson learned here.

CHADWICK: Larry Litton of Litton Loan Servicing in Houston, Texas.

Larry, thank you so much.

Mr. LITTON: Not a problem, sir. Thank you.

ALEX CHADWICK, host:

From the studios of NPR West, this is DAY TO DAY. I'm Alex Chadwick.

ALEX COHEN, host:

And I'm Alex Cohen.

Today President Bush presents a new deal to help homeowners who face soaring mortgage payments.

President GEORGE W. BUSH: The holidays are fast approaching and unfortunately this will be a time of anxiety for Americans worried about their mortgages and their homes. There's no perfect solution. But the homeowners deserve our help. And the steps I've outlined today are a sensible response to a serious challenge.

COHEN: President Bush speaking today from the White House. The administration has worked out an agreement for lenders to freeze rates on many subprime loans.

CHADWICK: So this deal is going to prevent some adjustable rate mortgages from resetting to higher rates for a period of five years. We'll spend the first part of today's program focused on that deal.

Bob Moon of MARKETPLACE is here. Bob, welcome. And this is not a bailout for everybody. Give us the details of what the president's plan is.

BOB MOON: Yeah, as you say, Alex, emphasis on it will affect some mortgages; this will not apply to everybody. It's supposed to help only those who need it. President Bush says borrowers will be eligible if they can show that they're a reasonable credit risk, that they can't afford their homes if the higher rates should kick in. And they actually have to live in their homes. This is an important point. That's an effort to weed out investors who took speculative risks and tried to flip homes, or whatever.

CHADWICK: So interest rates on a lot of these subprime mortgages are scheduled to reset, which means go up, in the next couple of years.

MOON: That's right. These adjustable rate mortgages have been around for quite a while. But the industry estimates as many as two million subprime mortgages are scheduled to reset over the next couple of years, most of those in the next year and a half. They could jump from around seven or eight percent to as high as 11 percent. That would be an increase of around 30 percent, even more in some cases, in monthly payments when these teaser rates expire.

CHADWICK: So does the plan that President Bush has announced today, is that going to be enough to deal with this very substantial foreclosure problem that we have?

MOON: Well, some experts don't think so. They still think that a wave of foreclosures is still ahead of us here. I spoke just a short time ago to John Taylor, who heads the National Community Reinvestment Coalition.

Mr. JOHN TAYLOR (National Community Reinvestment Coalition): What they're doing is sort of kicking the can along and hoping that the economy will change and housing values will go up to the point where people will be able to refinance because there will be more equity in the house.

Well, we know from everybody's projections that the mortgage market and the housing market is going to continue to go down through these resets, and that's another two years. You know, it's a Band-Aid solution secured by bubblegum and high hopes.

MOON: And Taylor says a lot of homeowners are already behind in their payments, and so they wouldn't even qualify for this program.

CHADWICK: The mortgage crisis is blamed for a lot of the problems on Wall Street over the last couple of months. How's the market reacting?

MOON: Well, the stock market did open higher today. For the most part, anything that might help head off a wider economic crisis is good news for Wall Street. There is, though, a bit of irony here. For those investors who have taken what are known as short positions on the mortgage industry, essentially they bet that the problem is going to get worse and the financial stocks are going to decline even further.

Well, if this action prevents that from happening, they're going to lose money on the deal if they end up seeing the market stabilize or at least not get as bad as they bet it will. And also bond investors who hold some of these mortgage-backed securities, they might - may not be happy about this deal either because they are now facing the prospect that their bonds aren't going to pay as much.

CHADWICK: Okay. We'll be following this story throughout the day. You'll hear more this afternoon on NPR's ALL THINGS CONSIDERED.

Bob, I suspect this is also the lead story today on MARKETPLACE.

MOON: As you can guess, absolutely.

CHADWICK: Thanks so much.

Bob Moon of public radio's daily business show, MARKETPLACE, produced by American Public Media.

COHEN: In Denver, Colorado, a town with one of the highest foreclosure rates in the country, the news of the president's plan has raised a lot of questions.

Zach Urban is a housing counselor there and he mans a hotline for troubled homeowners. Lately he's been flooded with calls and he was kind enough to take ours too.

Welcome to the program, Mr. Urban.

Mr. ZACH URBAN (Housing Counselor): Thank you for having me, Alex.

COHEN: What kind of questions have people been calling in with there lately?

Mr. URBAN: Well, the biggest question is what do I do now? How did I get out of the situation? What is the Bush administration going to do? How is this going to affect me as a homeowner? If I have an adjustable rate mortgage, does that mean my loan is going to be frozen, so to speak? And so a lot of these questions we're still waiting to be answered for us. But the main answer to a lot of these questions is, let's call your lender right now and let's get some options on the table and start working on this issue together.

COHEN: And do you have any sense of how many people - how many of the clients that you talked to might actually be affected or helped out by the president's plan?

Mr. URBAN: What I'm looking at with regard to the administration getting involved, as well as Secretary Paulson, is not so much this particular plan but the idea that lenders are willing to cooperate with borrowers, with communities. And so while freezing of interest rates may help a portion of people - I would say probably 20 percent - the bigger ticket here is related to the fact that lenders are now going to be working more closely with those who have seen this coming a long way's out.

And so that's the exciting part of this, for us at least, but we do definitely have some concerns about how this freezing of interest rates is going to affect everybody moving forward, whether it be first-time homebuyers, the general real estate market and the like.

COHEN: And for people who are calling in that may not be able to be helped out by this plan, what advice do you have for them?

Mr. URBAN: Well, my advice is that there's many options, and freezing of interest rates may be one of many options out there. And there are difficult options that involve leaving the property, but those would be obviously the last resort a mortgage community is going to look at. And from our perspective, being an independent adviser, we would want to make sure that we've exhausted all other avenues before we discuss those more difficult decisions of deciding to end the home ownership experience at this time and getting back up into it later on.

COHEN: I imagine that a lot of homeowners there have heard, you know, these words rate freeze, and they think, oh, phew, I'm going to be okay. But ultimately, is a rate freeze going to be the best option for everyone?

Mr. URBAN: I think this is what the treasury secretary and the administration is taking a close look at, is that when you talk about freezing interest rates, you need to take into consideration there's three different types of borrowers out there with adjustable rate mortgages: those for whom an adjustable rate mortgage isn't going to affect them whatsoever because they have the income to cover that change in their mortgage payment; those that no matter what happens with that adjustable rate mortgage, they're still not going to be able to pay the mortgage because their income has been diminished; and then the more appropriate group that they're focusing on at this point, are those for whom the freezing of the adjustment is going to work out the best for them - meaning that this five-year term they're speaking about is enough time for them to get squared away on all their other financial issues and then be able to look at this again in five years.

But for others, it's just putting a Band-Aid on a very long-term situation, and that's not the most appropriate option.

COHEN: Zach Urban is a housing counselor with Brothers Redevelopment in Denver, Colorado. Thank you.

Mr. URBAN: Thank you for having me.

CHADWICK: Listen to this, Alex. Not everyone likes the president's plan to freeze mortgage rates. You're going to hear from someone - Andrew Gerber(ph). He's an engineer. He lives in Denver. He bought his home a decade ago. He signed for a 15 year mortgage with a five percent interest rate; that's pretty good. He says he does sympathize with those who were taken advantage of by predatory lenders, but he does not feel for everyone.

Mr. ANDREW GERBER (Engineer): I think it's difficult to say to somebody, you have to loose your house. But then what about me, for instance, or a friend of mine who might have a six and a half percent 30 year fix that made the right choice at that time? Shouldn't they get a point or two off their current mortgage? I mean where is their money? You know, I mean they made the right decision and they're - they don't get anything. Someone made the wrong decision and they get - they get a handout.

CHADWICK: So there's one angry homeowner.

We're joined now by Larry Litton. He's president and CEO of Litton Loan Servicing. That's a company that manages the money that you send in for your mortgage. They pay the taxes. They make sure the bank gets its money. They service mortgage loans.

Larry Litton, welcome to DAY TO DAY. And tell me, how would you respond to that homeowner you just heard?

Mr. LARRY LITTON (Litton Loan Servicing): This is a point of time that we have a very difficult situation we have to deal with. We have rising delinquencies nationally. We have rising foreclosures nationally. I think we all recognize that foreclosures are very bad. They're bad for homeowners, they're bad for communities, and they're bad for property values for people that are able to, you know, make their mortgage payments.

And this is not about bailing out homeowners. Here's what this is about. This is about trying to take a situation where you have people that are struggling to make their payment; some people may not have fully understood the type of loan product they were getting into. Some people may have perfectly understood the type of loan product that they were getting into. But we have a situation where we have foreclosures that are going unchecked in many areas of the country. And those people that are able to make their payment are being adversely affected by these foreclosures because what happens is these foreclosures destroy the communities where they're located. It actually robs property value from everybody.

CHADWICK: So it's bad for the community.

Mr. LITTON: It's bad for the community.

CHADWICK: How many loans are you managing right now in your company?

Mr. LITTON: We service about 350,000 mortgage loans.

CHADWICK: How many of those do you think are in default or in danger of going into default?

Mr. LITTON: Well, out of these 350,000 loans in this market right now, we have about 25,000 of those loans are in some stage of foreclosure right now.

CHADWICK: Let me ask you about the business, because when I first hear about this, I think to myself someone has got a mortgage business based upon the idea that they're going to lend out money at a very low rate and then they're going to get a higher rate later on. I mean, that's their business plan, and now we're saying, okay, you're halfway into that; you're into the unprofitable part of that, and you're not going to get to go to the profitable part.

Mr. LITTON: Investors that invest in mortgage-backed securities understand that whenever they invest in these securities, that they are expecting a certain percentage of loans to go into default and then you take a loss on those loans. If the percentage of loans that goes into default is higher that what you expected and the losses are higher than what you expected, you end up actually losing more money in the long run.

So the argument is, if I can keep someone in their home and keep them in their home at a lower interest rate, do I end up reducing losses longer term? And that's the argument that we would make in terms of saying that loan modifications are a good thing if responsibly done.

CHADWICK: What is the big lesson coming out of this for the housing industry, the mortgage industry, the banking industry and the mortgage servicing industry of yours? I mean, are we going to be doing things differently five years from now because we've actually learned something from this?

Mr. LITTON: I think that's exactly right. I think what we've learned is that, you know, this is a great country where people deserve second chances. And we've created an environment and an industry where we can provide second chances to people that have troubled credit. But the lesson learned is that you have to do that in a responsible way, okay?

You can't provide a 100 percent financing, no documentation on their income, to people that have demonstrated a past inability to be able to pay their bills on time. I think the great lesson learned is, is that if you're going to provide second-chance opportunities, you have to do it in a way where people have skin in the game, to where they actually put money down, where we have responsible, very well-defined loan products where people really know what they're getting into. I think that's the great lesson learned here.

CHADWICK: Larry Litton of Litton Loan Servicing in Houston, Texas.

Larry, thank you so much.

Mr. LITTON: Not a problem, sir. Thank you. Transcript provided by NPR, Copyright National Public Radio.