The Pitfalls of the Mortgage Bailout

The plan to help out struggling borrowers won't do much to stem the tide of foreclosures.

The plan aims to prevent a wave of expected foreclosures by allowing troubled homeowners facing interest-rate hikes in the next two years to keep their low, introductory rates for up to five more years. The Bush administration says that as many as 1.2 million of the 1.8 million homeowners facing rate resets over the next two years will be eligible to apply. But probably far fewer will qualify -- perhaps only several hundred thousand.

The hurdles are many. The rate-freeze plan applies only to borrowers who took out loans between the start of 2005 and July 30, 2007, and whose rates are scheduled to rise between January 1, 2008, and July 31, 2010. Anyone whose rate has already reset is stuck with the higher payment. Homeowners who are in arrears by more than a month, or those who have been 60 days late more than once in the past 12 months, are ineligible. Homeowners who are in the foreclosure process, or those who have already refinanced their loan, are also ineligible. And only homes that are occupied by owners qualify. Lenders and loan servicers get a lot of discretion to decide who's in and who's out.

Taxpayers are off the hook. Lenders and Wall Street firms will foot the bill because the cost of renegotiating loans is less than the cost of a foreclosure.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Investors will pay a steep price because the freeze lowers the monthly payments they expected to get. The list includes overseas hedge funds but also mutual funds, money markets, pensions and 401(k) plans closer to home and heart. Expect a host of shareholder lawsuits.

Associate Editor, The Kiplinger Letter