Bush Proposals To Counter Rising Foreclosure

January 18th, 2008

The federal government has been compelled to take actions on certain fronts owing to the escalating sub-prime mortgage crisis (2007 has witnessed the highest foreclosure filings ever) coupled with the sluggish national real estate market, posing a precarious situation for the economy, which is now faces a possible recession.

In alliance with the mortgage companies, President Bush has proposed to introduce a five-year freeze on the interest rates of selected sub-prime mortgages. Coined as the “teaser-freezer,” this step is anticipated to benefit approximately 250,000 home owners, which is just a small percentage of roughly 3.5 million mortgages on the verge of defaulting in the coming 30 months. He is facing wide criticism from many quarters over how effective this measure will be against the onset of foreclosures in the long run.

A proposal is being initiated by the federal government to issue insurances on the high value loans and attempts to enhance the upper limit of credit (there is a cap of $417,000) handled by Fannie Mae and Freddie Mac. Since August, the government has reduced the interest rates by a whole percentage point and propositions in the forms of certain rules and regulations to curb the assertive and exploitative lending practices.

This month, five of the New England Banks- the Webster Bank, the Citizens Bank, the TD Bank north, the Bank of America and the Sovereign Bank- have pooled in and formed a ready finance of $125 million to tide over refinancing problems that the borrowers might face in future due to increment in interest rates and risk foreclosure.

These steps are being taken to safeguard borrowers with variable interest rates that might become unaffordable and those on the verge of defaulting. It aims to reduce the possibility of foreclosure by adjusting the interest rates to reasonable levels. It remains to be seen if this measure will be effective or not.

States the economic Professor of the University of Rhode Island Leonard Lardaro that the extent to which the foreclosure and sub-prime mortgage crisis will affect the economy is still unknown. He says, “The dimension of what’s going on is atypical. Clearly, this has a potential to get worse. There is a still a lot we don’t know yet. Speaking specifically for the state of Rhode Island, he said, “We had a really rapid run-up in prices during the boom years, 2000 to 2005, so we have a ways to fall.”