Washington’s sub-prime fix expected
A federally sponsored plan to stem home foreclosures by having lenders freeze “teaser” mortgage interest rates for certain high-risk borrowers could be announced as early as this week.
Details of the program, promoted by Treasury Secretary Henry M. Paulson Jr. but left largely to the industry to finalize, were worked on over the weekend. The plan calls for immediate action by lenders and their bill-collection arms. Aiming for a longer-range solution, lawmakers from Washington to Sacramento are debating a variety of proposals.
Paulson, who has called housing problems the greatest threat to the U.S. economy, was expected to field questions about the initiative at a forum today in Washington.
Persuading lenders to address the problems is seen as politically important for Republicans. Democrats, who support tighter regulation of the mortgage business as well as changes in loan terms, accuse the Bush administration of having done too little as foreclosures rise and the interest rates on millions of sub-prime mortgages begin to ratchet higher.
Changing the terms of such mortgages made to people with weak credit is tricky, however, because Wall Street has packaged most of these loans to back securities that were sold to investors around the globe. As defaults reduce the value of those securities, the investors are fighting to limit their own losses.
A loan-modification plan “is in the best interests of both borrowers and investors simply because a performing loan is preferable to a foreclosure,” said Andrew Gray, spokesman for the Federal Deposit Insurance Corp., which is involved in the discussions with lenders.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, also weighed in with a prepared statement. “I am encouraged by reports of progress in Secretary Paulson’s and our efforts to move industry to seek large-scale loan modifications for borrowers who, facing interest rate resets, are in danger of losing their homes,” said Frank, a prominent critic of the administration’s oversight of the mortgage industry.
The program would be aimed at more than 1 million sub-prime borrowers facing increases in their monthly mortgage payments as the initial interest rates run out, according to officials familiar with the proposals.
It would apply to borrowers who are up to date on their payments on sub-prime adjustable-rate loans, allowing them to stay at their initial payment level longer than their original terms allow.
Paulson has said rate freezes would not be offered to people who can afford the adjusted payment or those who, despite having made mortgage payments so far, have too little income and assets to do so in the future. Another issue was whether to exclude heavy borrowers who owe more than their homes are now worth.
Lenders and regulators are still discussing how long payments would be frozen -- three, five and seven years are being considered.
Officials stressed that the plan, which would be voluntary for lenders, would involve no government funding and, because it would be limited to loans on owner-occupied homes, would not be a bailout for speculators.
An announcement of a plan could come this week, according to officials who spoke on condition of anonymity.
Estimates of the number of sub-prime borrowers facing resets to higher monthly payments range from 2 million to 2.5 million. About 1.2 million of them would qualify for the temporary rate freeze as it is currently proposed, according to the FDIC. The agency’s chairwoman, Sheila C. Bair, was the first administration official to advocate widespread freezing of initial rates.
A major hurdle to the deal has yet to be overcome: getting agreement from investors in mortgage-backed securities, who have resisted modifying loans except on a case-by-case basis.
“There is a $64,000 question: Will investors go along with this plan? And if not, can they be compelled to?” asked Sen. Charles E. Schumer (D-N.Y.), chairman of Congress’ Joint Economic Committee.
At a congressional hearing in Los Angeles on Friday, an official with a trade group representing investors sidestepped questions about whether its members would agree to the emerging plan.
But in an interview after the hearing, Tom Deutsch, deputy executive director of the American Securitization Forum, said his group would be able to agree to a standardized plan as long as loan servicers could still evaluate borrowers on an individual basis.
“Our standpoint is evolving as the industry is evolving,” he said. “The one thing that will not change is there needs to be some kind of loan-by-loan analysis.”
Government officials and lenders hope the Treasury proposal negotiated by Paulson will help stabilize credit markets by enabling more sub-prime borrowers to avoid defaulting on their mortgages.
The spike in sub-prime foreclosures this year has rocked financial markets, with banks and other holders of mortgage-backed securities trying to figure out how many billions of dollars they have lost.
Treasury officials have made it clear in recent days that Paulson is anxious to spur quicker industry action to prevent foreclosures, which many fear would accelerate an already sharp decline in home prices.
Michael Calhoun, president of the Center for Responsible Lending, a consumer group, questioned whether the administration strategy would go far enough to help beleaguered borrowers. Many lenders have been in a position to modify sub-prime loans for months, he said, but have been biding their time.
One reason, he said, is that many struggling borrowers have second mortgages, complicating the situation. Another is the unresolved resistance of investors, who could sue if the terms of their securities are violated. And finally, he said, mortgage servicers make money on foreclosures.
“All the incentives are pointing the wrong way, and that’s why we haven’t seen modifications,” Calhoun said.
The hearing Friday in Los Angeles, called by Rep. Maxine Waters (D-Los Angeles), drew more than 200 people, many of them vocal.
“Our state lies at the epicenter of the foreclosure wave,” Waters said. “The stakes could not be higher.”
Reynolds reported from Washington, Chang and Reckard from Southern California. Times staff writer Jonathan Peterson in Washington contributed to this report.