Some Cry Foul Over Relief Plan For Borrowers
By SUDEEP REDDY, DOUGLAS BELKIN and JONATHAN KARP
The Wall Street Journal
December 4, 2007
The Bush administration’s plan to give subprime borrowers a break on their mortgages is already catching flak from an unexpected source: other homeowners. But as outlines of the plan become known, some homeowners are complaining that the effort isn’t fair to borrowers who didn’t overextend themselves. Others argue that the government shouldn’t be involved in perpetuating a housing bubble that needs to deflate. A key question: How far should you go to help borrowers who can’t pay their bills?
“People have to be responsible for their own actions,” says Harry Lancz, a small-business owner in Traverse City, Mich. He holds a pair of fixed-rate mortgages, one for his primary residence, which has been for sale for six months, and one for a second home in Louisiana. “What are you going to do when their credit cards get due and they can’t pay? Are you going to bail them out on that, too?”
RESCUE PLAN OR BAILOUT?
Even some subprime borrowers object to the plan. Justin Miller, a 27-year-old mortgage broker in Coral Springs, Fla., says he made a bad investment decision when he bought a $600,000 oceanfront home last December with two subprime loans. But he’s committed to making the $6,000 in monthly payments – and the higher payments once the rates go up.
“A lot of people are trying to point fingers and get themselves out of something they put themselves into,” he says. “I put myself in this position. I need to find a way to make it work.”
Mr. Miller says that the rate-freeze proposal reminds him of a television commercial: The announcer asks, “Do you owe back taxes?” A client responds, “I settled for half of what I owe.” Says Mr. Miller: “How’s that fair? Everything seems to be backward.”
The Paulson plan wouldn’t help subprime mortgage holders who can afford the higher payments. In addition, it won’t help those who can’t manage to make their payments even at current rates. Because of that, some consumer advocates say the plan doesn’t go far enough in helping troubled borrowers.
“This only deals with one of the easiest of the categories” of borrowers, says Mike Shea, executive director of Acorn Housing Corp., a national housing-counseling organization. “It will do nothing to help those people who are currently delinquent and facing foreclosure.” Mr. Shea praises Mr. Paulson for trying, but points out, for example, that some mortgage-loan servicers already are freezing rates for five to seven years, so a grace period shorter than that in the government’s proposal could be a step backward.
Proponents of the plan say it would prevent the housing sector from derailing the rest of the U.S. economy. In addition, they say that “predatory” lenders – not just careless borrowers – are responsible for the mess, and that homeowners shouldn’t necessarily lose their homes as a result.
But some would-be homeowners who have been waiting for house prices to fall say the government proposal would prop up prices, and thus keep them out of the market.
“I’ve been trying to do what I would consider the right thing,” says Daniel Theda, 39, a product manager for a manufacturer in Vancouver, Wash., who has been saving for two years to buy a home. “It’s kind of frustrating when all of a sudden these guys come and say we’re going to bail out people.” He says he lost several hundred thousand dollars from bad investments during the technology-industry bust, but nobody came to his rescue. “It’s just upsetting,” he says. “It seems unfair that the government and Paulson would get involved with the free market.”
Patrick Barron, a business consultant in West Chester, Pa., blames the government for keeping interest rates low for years and creating today’s conditions. “People were encouraged to borrow money they can’t pay back,” he says. “It’s the government that’s at the heart of this problem.”
Mr. Barron, 60, says a government-led solution won’t solve the problem. “The whole idea that everybody can win and nobody loses is on the face of it ridiculous,” he says.
Steve Bailey, a 73-year-old retired homeowner in Fairway, Kan., says he hopes the government’s involvement will be limited. “I don’t see how people can be so naive as to fall into these traps,” he says. “But they do. I don’t think it’s the government’s job to straighten them out.”
For many people, the crucial question is whether taxpayers will pick up the tab; Mr. Paulson said they won’t. Melissa Huelsman, a Seattle lawyer who represents homeowners facing foreclosure, says she is in favor of a relief plan as long as it doesn’t entail public funds. “I would support it if the lenders and Wall Street take the hit,” she says.
Ms. Huelsman says there is a misconception that many “teaser rates,” which would be frozen temporarily, are themselves affordable. “I have very few clients who actually started out with low rates, or if they did, they adjusted after one or a few months,” she said. “The loans my clients got had initial ‘teaser rates’ of 8% or more, so while perhaps preventing them from adjusting to 15% would be helpful, it’s not like they are at a good rate to begin with.”
With details about the plan unclear, some consumer advocates are unsure how much it would help. “I think that it might be a temporary fix, but it would really depend on what type of restrictions there were,” says Joann Hauger, executive director of Community Housing Resources of Arizona, a nonprofit that helps low-to-moderate income families buy their first home. “Personally, I don’t know that it’s going to solve the housing crisis.”