Perhaps the best thing that can be said for the plan announced yesterday by the Bush Administration to help subprime mortgage borrowers is that no one seems to like it. Advocates for borrowers point out that it will only apply to a small percentage of homeowners who need help, and that in any event, its guidelines are entirely voluntary. Notwithstanding the lack of any mandate, investors seem equally unenthusiastic, as some holders of paper will undoubtedly find themselves without any recourse after the mortgages underlying their loans have had their initial “teaser” rates frozen for five years.
At the end of the day, what has emerged from the discussions between Treasury Secretary Paulson and representatives of a number of financial institutions amounts to little more than a new set of industry standards and practices for mortgage servicers in their dealings with subprime borrowers. As most lenders already know, working out a distressed loan will often be a better business decision than foreclosing, given the costs of remedy enforcement and asset value deterioration between foreclosure and resale. To the extent that the new guidelines permit more workouts by giving mortgage servicers more leeway (i.e., protecting them from potential lawsuits from holders of underlying securities that may be more inclined to take a hard line stance), they will have some beneficial impact. Overall, however, they will have little effect on a growing crisis.