ECONOMY: U.S. Banks Offer "Lifeline" as Mortgage Crisis Spreads

By IPS Correspondents Reprint | | Print |

Abid Aslam

WASHINGTON, Feb 12 2008 (IPS) - U.S. borrowers in the throes of foreclosure won a temporary reprieve Tuesday under an initiative cobbled together by the Bush administration and six leading mortgage lenders.

The move came amid warnings that the economic outlook continues to worsen and as President George W Bush prepared to sign, on Wednesday, 168 billion dollars in tax rebates and business incentives aimed at averting a prolonged recession.

"Project Lifeline", announced Tuesday, will suspend foreclosure proceedings against delinquent borrowers, allowing them time to negotiate payment plans or attempt to alter the terms of their mortgages.

In a sign that the U.S. mortgage crisis continues to spread, the reprieve will be available to all borrowers from the participating financial institutions. Until now, relief efforts have been limited to borrowers with poor credit who took out the high-risk, high-cost loans that have been the focus of the mortgage mess.

Firms backing the new plan service nearly half of all mortgages in the country. They include Bank of America Corp., Citigroup Inc., Countrywide Financial Corp., JP Morgan Chase & Co., Washington Mutual Inc., and Wells Fargo & Co.

"Project Lifeline is a valuable response, literally a lifeline, for people on the brink of the final steps in foreclosure," Alphonso Jackson, the housing and urban development secretary, said at a news conference.

"No programme can bring every struggling borrower into the counseling and evaluation process, and we cannot help those who choose not to honour their obligations," said Paulson. "But Project Lifeline has the potential to offer new solutions to responsible, able homeowners who want to keep their homes."

"Of course, there will be homeowners who still take no action, and some will simply walk away from their mortgage, particularly those borrowers who put little or no money down and whose mortgage exceeds their home value," Paulson said.

Project Lifeline will offer borrowers 90 days or more behind on their mortgage payments the chance to suspend foreclosure proceedings for up to 30 days. During this time, lenders will weigh new payment plans or possible loan refinancing.

The initiative will prove inadequate, said Chris Dodd, chairman of the Senate Committee on Banking, Housing, and Urban Affairs.

"This plan, while a step in the right direction, will not stem the tide of the millions of foreclosures we are facing in the coming months," Dodd, a Democrat, said in a statement.

Paulson, who until recently opposed a moratorium on foreclosures, vowed further action. "We will look for additional opportunities to try to avoid preventable foreclosures," he said. "However, none of these efforts are a silver bullet that will undo the excesses of the past years".

The latest effort builds on a scheme, launched late last year, to freeze interest rates on qualifying subprime mortgages for up to five years. Typically, the loans feature interest rates that are set artificially low in order to entice loan applicants but that rise rapidly after one or more years.

Extra efforts have proven necessary for two reasons.

First, prior relief efforts have benefited few. Paulson acknowledged that only about 16 percent of some 775,000 at-risk borrowers who were sent letters by their mortgage lenders had responded in the course of three months.

Second, the credit crisis is spreading. Officials and analysts have said that as home prices fall and banks tighten lending standards, even borrowers with good credit histories are falling behind on loan and credit card payments in increasing numbers and at a quickening pace. Politicians have begun to warn of an impending credit card crisis to dwarf the subprime mortgage fiasco.

Even so, Bush on Monday sent his last annual economic report to Congress without altering the administration&#39s forecast of 2.7 percent economic growth for 2008.

By contrast, private-sector economists have said they expect growth of just 1.6 percent. Late last month, the International Monetary Fund, citing the credit woes, downgraded its estimate of 2007 U.S. growth to 1.5 percent and warned that it could slow to a negligible 0.8 percent in 2008. This would fall behind population growth, estimated at 0.9 percent.