Posted by Matt (OC Register)

President Bush announced a plan today to help some subprime borrowers with adjustable-rate mortgages keep their homes. He said some loan servicers have agreed to freeze for five years the low introductory rate on subprime mortgages, if the borrowers demonstrate they can't afford the loan when the teaser rate ends.

I interviewed three sources about the plan and got wide-ranging reactions.

Michael Pento, a senior market strategist with Delta Global Advisors, an investment advisory firm in Huntington Beach, lambasted the plan.

"I hate it. I think it's disgusting," Pento said.

He said the plan would perversely encourage subprime borrowers whose loans reset to miss payments, since that would show they can't afford the higher rate. He also said government was dangerously close to modifying private contracts, because investors bought loans anticipating rate increases in the mortgages.

And, finally, the plan is morally reprehensible, he said.

"It's anti-capitalist to have responsible consumers punished and reckless consumers rewarded," he said. He said renters who have been patiently waiting for home prices to fall and saving their money now may face an extended wait, since the Bush plan may prolong the housing correction.

"Who is speaking for them?" he said of renters. Such folks are getting the message they should have gambled recklessly on buying a home, he said.

On the flipside: Steve Bailey, senior managing director in Countrywide Financial's Simi Valley office, said the pact is nonbinding on lenders, but they will be under political pressure to follow its guidelines. That's good for homeowners, and will be of some benefit to the housing market, he said.

"I can tell you the rate of foreclosure increase in this product will definitely slow," Bailey said. "It will not make home prices go back to positive increases. That's really what's driving the increase in foreclosures."

Bailey said loan servicers will remain legally obligated to serve the best interest of investors who own the loans. The president's plan, however, will put pressure on lenders to look closely at modifying subprime loans to see if it would be in everyone's best interest to freeze a teaser rate as opposed to a possible foreclosure and loss.

Scott Anderson, a senior economist with Wells Fargo in Minneapolis, said the plan could forestall a recession, but it could also lead to an extended period of sluggish economic growth. He compared it to slowly pulling off a Band-Aid rather than ripping it off.

Anderson compared the current real estate downturn in the U.S. to one in Japan in the 1980s when the government there intervened.

"Those banks were kept on life support and they kept the bad loans on the books," Anderson said. "The result was a decade of sluggish growth."

And he said the President's plan could result in lawsuits from borrowers not included in the plan or from investors in mortgages.

"This could be a goldmine for trial lawyers," he said. "The lawyers will win again."