More aid planned for sinking borrowers
Two big lenders stepped up Wednesday with plans to help some strapped mortgage borrowers, while a Capitol Hill summit on rising foreclosures put pressure on other industry players to work with troubled homeowners.
Freddie Mac, a government-chartered company that buys mortgages from lenders, said that it wanted to encourage lenders to make “consumer-friendly” sub-prime loans and that it agreed to buy $20 billion of such new adjustable- or fixed-rate mortgages.
Separately, Washington Mutual Inc., a major sub-prime lender, committed as much as $2 billion to refinance customers’ sub-prime loans at what the bank said would be discounted interest rates.
Sub-prime loans typically are made to people with poor credit histories. Defaults on these mortgages have soared in recent months as more borrowers have found they were in over their heads. Falling housing prices have left many of them unable to sell their homes for more than their loan amounts and unable to refinance.
Although housing industry experts said the programs announced Wednesday were small compared with the number of homeowners nationwide who might face foreclosure because of loans they couldn’t afford, the plans raised hopes that other lenders would come forward with similar programs.
The money committed “is not going to solve the problem, but it’s a start,” said Eric Halperin, director of the Washington office of the Center for Responsible Lending. “You need everyone to do a piece of it,” he said of the mortgage industry.
That also was the theme of the Capitol Hill summit convened by Sen. Christopher J. Dodd (D-Conn.), who called in government regulators, consumer advocates and executives of major lending firms to discuss the mortgage crisis.
After the summit, Dodd said the participants agreed that “concerted efforts” should be made to prevent foreclosure, including loan workouts and refinancings that reduce borrowers’ loan payments.
Some Democrats in the Senate have raised the possibility of direct government intervention to help sinking borrowers. Dodd, who is chairman of the Senate Banking Committee, has backed away from the idea.
“I’m not overly anxious to legislate,” he said Wednesday.
Some analysts have estimated that more than 2 million people nationwide, including 460,000 in California, could lose their homes because they can’t make their payments.
There are more than $1 trillion in sub-prime loans outstanding. More than 13% of the loans were behind on payments at the end of last year, according to the Mortgage Bankers Assn.
Many housing experts say that for a large number of struggling homeowners, the only real hope they have of staying in their houses is to try to cut a deal with their lender.
“One of the things that was a big focus at the summit was, what can the [loan] servicers do” to reduce mortgage payments, said Halperin of the Center for Responsible Lending, who took part in the meeting.
Richard Syron, chief executive of Freddie Mac, said his company’s pledge to buy $20 billion in loans was an attempt to encourage sub-prime lenders to refinance borrowers who were in trouble.
Syron said Freddie Mac wanted to work with lenders to develop sub-prime loans that were less likely to lead to defaults. One idea is a 40-year loan that would stay fixed for 10 years before adjusting to changes in market interest rates. Many current sub-prime loans have rates that adjust sharply higher after one or two years.
Freddie Mac said it expected to have new loans available through lenders by mid-summer.
Fannie Mae, another government-chartered mortgage financier, also has pledged to develop loans to help some sub-prime borrowers avoid foreclosure.
Seattle-based Washington Mutual said its refinancing program was aimed at bringing customers to the table to discuss a loan workout before they begin having problems making payments -- for example, in advance of an interest rate change on an adjustable loan.
“We are hoping that consumers call us early” if they expect to have difficulty with their loan, said David Schneider, the head of Washington Mutual’s home loans group.
He said customers who qualify to refinance under the program would get below-market rates on their new loans. A sub-prime customer who qualifies for a 9% loan, for example, might instead get a rate of 8.5%, Schneider said.
Still, experts warn that many borrowers who have had sub-prime loans at temporarily low “teaser” rates, and who don’t have the income to qualify for market-rate or near-market-rate loans, may find that no lender will be willing to refinance them.
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jonathan.peterson@latimes.com
Petruno reported from Los Angeles and Peterson from Washington.
