Market reacts to US Treasury subprime plan

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WASHINGTON, DC – Regulatory and industry bodies are starting to react to the new US Treasury plan to rescue about a million US homeowners from the subprime crisis and avert growing fears of a US recession.

The plan is to freeze interest rates for five years for those subprime borrowers most at risk of defaulting on their mortgages, and involves analysing each individual case to make judgments.

The plan could lead to some abuse of the system, because income evaluations will determine whether people are eligible for the freeze. It could also leave homeowners vulnerable again, as US house prices fall from the level at which many took out their mortgages.

“The approach announced today is not a silver bullet. We face a difficult problem for which there is no perfect solution,” said Treasury secretary Henry Paulson.

While participation in the scheme – developed between the US Treasury and the mortgage industry – is voluntary for lenders, the plan could have repercussions for bondholders if it is seen as a veiled government bailout for America’s debtors, affecting the risk assessment for future mortgages.

But Paulson’s plan might be the lesser of the evils. “The plan appropriately focuses on those who are current in their financial obligations but will be unable to meet reset-rate payments,” says Edward Yingling, president of the American Bankers Association. “This will not only reduce foreclosure risks and help families in need, but it will also add substantial stability to a portion of the mortgage market that has been in disarray.”

Industry involvement rather than government cash could benefit the scheme most. Federal Deposit Insurance Corporation chairman Sheila Bair says: “I applaud secretary Paulson's vision in recognizing that we are in a virtually unprecedented credit environment and that difficult choices have to be made. In particular, I want to thank the President for his personal interest and support for this initiative.”

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