WASHINGTON (MarketWatch) -- The mortgage industry has agreed on a plan to help some struggling borrowers keep their homes, Bush administration officials said Thursday.
Elements of the plan include a five-year freeze on interest rates for certain subprime loans, many of which are expected to reset to higher rates in the months ahead.
Treasury Secretary Henry Paulson said that the plan involves no government money, and that he expects companies that service loans to abide by guidelines for refinancing and modifying subprime mortgages for able borrowers.
Speaking at the White House, President Bush said that the plan was not a bailout for investors.
Under the plan, negotiated by the Treasury and White House with representatives from the private sector, borrowers will be able to refinance an existing loan into a new private mortgage or be moved into a loan from the Federal Housing Administration.
In 2008 and 2009, about 1.8 million subprime mortgages will reset to higher interest rates, according to Paulson. Many foreclosures are expected to follow.
The plan is estimated to help as many as 1.2 million homeowners avoid foreclosure, he commented.
"It is in everyone's interest -- homeowner, servicer, investor -- to develop a market-based approach to avoid foreclosures that are preventable,"Paulson said at a Thursday afternoon news conference. "The approach announced today is not a silver bullet."
He added the administration would continue to work on the problems created by the slump in housing and credit markets.
Five-year plan
The five-year freeze, Paulson said, would give borrowers a chance "to work through this housing cycle."
Speaking to reporters after the announcement, Wells Fargo Home Mortgage Co-President Michael Heid said that it would take "a matter of days" for a borrower to work out new terms on a loan.
Servicers are modifying "today," according to Heid, a member of the housing-industry group that worked out the plan.
Consumers must reach out and make contact with their servicer or a not-for-profit credit counseling agency to take advantage of Thursday's announcement, he said.
The administration, lawmakers and the industry itself have been under intense pressure to aid strapped borrowers. The subprime problem is also beginning to emerge as a campaign 2008 issue, with Democratic presidential candidates trotting out their own plans to help borrowers.
On Wednesday, Democratic front-runner Sen. Hillary Clinton said that Wall Street shares the blame for the subprime mortgage crisis and should get behind voluntary proposals to shield working families from a rising tide of foreclosures, or face the prospect of a legislative crackdown. See full story.
Democrats want more
Congressional Democrats said they welcomed the plan, but that it was incomplete.
"Not having a prepayment-penalty addressed, I think, is a flaw,"House Financial Services Committee Chairman Barney Frank, D-Mass., said at a hearing Thursday.
"There is much more that still needs to be done, most essentially the funding for nonprofit counselors that the president is threatening to veto,"
said Sen. Charles Schumer, D-N.Y., the chairman of the Joint Economic Committee.
Record third-quarter foreclosures
Before the administration's announcement, the Mortgage Bankers Association reported that the number of homes in foreclosure rose to a record level in the third quarter, with 1.7% of homes in foreclosure. The number of delinquent mortgage rose to 5.6%.
In remarks prepared for the news conference, Comptroller of the Currency John Dugan also said the plan is a "safe and sound practice" for national banks that service mortgages.
The administration's plan is a model "best practice" for the industry to address a number of competing interests, he added.
"Most important, it constitutes another creative way to allow current borrowers to stay in their homes."
The Center for American Progress, a liberal think tank, commented that the plan fails to address the needs of people whose rates have already reset, or creditworthy borrowers with negative equity in their homes.
"The administration can and should do more,"
said Andrew Jakabovics, associate director of the center's economic mobility program.
The White House also has proposed allowing cities and states to issue tax-exempt mortgage bonds to refinance existing loans. Bush is calling on Congress to approve the temporary measure quickly. 
WASHINGTON (MarketWatch) -- Under prodding from the government, the mortgage industry has agreed to give more than a million homeowners the chance to modify their subprime adjustable-rate loan before they fall behind in their payment.
I'd like to have my rate frozen. What do I need to do?
You must call a special hot-line or your mortgage servicing company.
The plan is open to a select group of homeowners. To be eligible, a borrower must have a FICO credit score of 660 or less, have taken out an adjustable-rate loan between Jan. 1, 2005 and June 30, 2007, and be current on payments. The industry estimates that about 1.2 million homeowners may be eligible.
Any borrower who wants to participate must contact the HOPE NOW coalition at 1-888-995-HOPE. There is no automatic signup. Some lenders will send letters to borrowers who may qualify, but some may not. Some lenders aren't part of this voluntary plan, but may be open to a case-by-case modification.
What if I've fallen behind in my payment?
Borrowers who are delinquent should contact their lender, mortgage servicer or a nonprofit credit counselor immediately to try to work out a payment plan. The rate freeze is not automatically available to those who are behind in their payments. Lenders have an incentive to modify your loan so you can stay current. They don't want to own your house, but they also want to be repaid.
Of 1.8 million subprime ARMs due to reset in 2008 and 2009, an estimated 600,000 are already delinquent and not eligible for the fast-track modification plan announced Thursday.
What's the next step if I'm current with my payments?
Once you've shown you're current, the servicer will determine whether you're eligible for a modification, based on the standardized criteria established by this plan.
The next step is to see whether you could refinance your current ARM into a sustainable mortgage with a payment you can afford under stricter lending standards that have now been put into place, including income verification and tighter requirements on debt-to-income ratios. The plan does not cancel existing pre-payment penalties.
If you can't refinance, the servicer then evaluates your ability to afford the higher payment that you'll owe once your adjustable-rate resets. If you can afford the higher payment, according to industry standards on debt-to-income ratios, you won't be offered any modification.
If you can't afford the higher payment, your interest rate will be frozen at the "starter" rate for five years. For most subprime borrowers, the starter rate is between 7% and 9%. The starter rate is not a "teaser" rate of 1% or 2%, which may be offered for a few months at the beginning of a loan, before jumping to the starter rate.
If it's not clear whether you can afford the payment or not (based on a quick analysis of your history and your loan), then your case would leave the assembly line and go to a case officer for more detailed individual evaluation. You'll either get a rate freeze, or you'll be told to get ready to pay the higher rate.
I thought this was going to be a blanket freeze on all interest-rate resets? Why not just freeze everybody's interest rate? Wouldn't that prevent more foreclosures without having to evaluate each loan?
Freezing everybody's rate would violate the rules for securitizing mortgages, which typically allow modifications only when the loan is in default or in danger of going into default. The goal of preventing foreclosures was balanced with the goal of maintaining a functioning securities market, which could be decimated if the accounting or tax treatment of securitized loans were changed ad hoc.
What if I have a fixed-rate mortgage, or a prime adjustable-rate loan that is about to reset?
You aren't eligible for this plan, but you should contact your lender or servicer if you feel you can't make your payment.
Isn't this a government bailout?
The government isn't using any taxpayer money for this plan. The costs will be borne by the mortgage industry.
Why should these deadbeats be helped? They signed a contract and should suffer the consequences of their bad decision to take out a mortgage they couldn't afford. I did the responsible thing, and no one is helping me with my payment.
Life is unfair. Some undeserving people will benefit from the plan. Some people were greedy. Some were unscrupulous. But many subprime borrowers didn't understand the consequences of what they agreed to. Even the mortgage industry accepts that most borrowers don't understand the terms of their loans. It's apparent that even the most sophisticated investors didn't really understand the risks from subprime lending.
The industry has agreed to this plan because it is in their interest to limit foreclosures if at all possible. No one is being forced to modify loans. The government worked for the agreement because it wants to prevent foreclosures from destroying families, neighborhoods and the economy.
It's possible that preventing foreclosures will also prevent housing prices from falling as far as they might. Depending on whether you are buying or selling, that's either a good or a bad thing.
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