Treasury Secretary Paulson Negotiating Accord to Stem Foreclosures

U.S. Treasury Secretary Henry Paulson is negotiating an agreement with lenders to stem a surge in foreclosures by fixing interest rates on loans to troubled subprime borrowers, according to people familiar with a meeting he led today.

Paulson, who addresses a housing conference on Dec. 3, presided over a one-hour gathering at the Treasury Department in Washington with federal regulators, bankers and lobbyists. Executives of Citigroup Inc., Wells Fargo & Co. and Washington Mutual Inc. attended, said a person present, who spoke on condition they not be identified.

The Bush administration cut its growth forecast today, reflecting a deepening housing recession that’s roiled financial markets since August. The Commerce Department reported today that the median price of a new house fell 13 percent in October from a year ago, while fewer homes were sold than economists anticipated.

“One of the roles of Treasury is to say `come on, let’s get together and see what we can do,”‘ said Wayne Abernathy, executive director of financial-institutions policy at the American Bankers Association in Washington and a former Treasury assistant secretary. “You’re likely to come up with something that will work both in the marketplace and honor the sanctity of the contracts involved.”

Paulson was joined today by Federal Deposit Insurance Corp. Chairman Sheila Bair, Comptroller of the Currency John Dugan and Office of Thrift Supervision Director John Reich. Also represented was the American Securitization Forum, which lobbies for investors, traders, underwriters, accounting firms, ratings companies and other institutions involved in the creation and sale of mortgage-backed securities.

Freeze Proposal

Bair has proposed letting borrowers with adjustable-rate subprime mortgages, who are living in their homes and unable to afford resets, get extensions on the starter rate for at least five years. They could also be offered 30-year fixed-rate loans. Reich prefers a three-year year freeze.

“There needs to be agreement and commitment to modify the loans, and there needs to be a transparent process whereby we can monitor the agreement,” Bair said in an interview in Washington earlier this month.

Jennifer Zuccarelli, a Treasury spokeswoman in Washington, declined to discuss the meeting in detail. “We are encouraged progress is being made,” she said.

Mortgage Delinquencies Climb

Delinquencies on subprime mortgages, which account for less than 15 percent of the $11.5 trillion U.S. home mortgage market, climbed after what Fed officials have labeled “lax” lending standards spread the past two years. Homeowners were behind on 17 percent of adjustable-rate subprime loans in June, compared with 4.2 percent for prime mortgages of the same type, Mortgage Bankers Association data show.

The rout will get worse because defaults on home loans are likely to rise, analysts said. The FDIC estimates that 1.54 million nonprime mortgages valued at $331 billion will reset by the end of next year. Subprime loans, given to people with poor or incomplete credit histories, typically offer a low introductory rate for the first two or three years. The rate then resets for the duration of the mortgage, usually 30 years.

Recession Warning

Rising defaults “will take the housing market down another level,” said Mark Zandi, chief economist at Moody’s Economy.com, who will attend the conference featuring Paulson next week. “In the context of an economy that is not in recession, but pretty close, we will be in a recession right in the teeth of a presidential election.”

Regulators still lack reliable estimates on the extent of the subprime mortgage crisis.

Three months after they asked banks to modify loans for borrowers at risk of default, agencies have little comprehensive data on what lenders and loan servicers have done, officials say.

The Treasury has urged the Mortgage Bankers Association to gather precise data on loan modifications.

“There is obviously a need to have more comprehensive data out there on what servicers are doing for borrowers,” said John Mechem, an MBA spokesman in Washington.

Mortgage-industry lobbyists have argued an across-the-board solution is difficult to apply. Rewriting contracts also risks moral hazard — encouraging borrowers to take on more debt in the expectation of being bailed out if needed later.

“It is really an indiscriminate procedure that would violate the terms of the contract that provide for loan-by-loan decision making,” George Miller, executive director of the American Securitization Forum, said in an interview earlier this month. A broad approach would “significantly disrupt the reasonable expectation of investors” in the $7.1 trillion market for bonds backed by mortgages.

http://www.mortgagebankers.org

Paulson Negotiating Accord to Stem Foreclosure Surge
By Alison Vekshin and Craig Torres | Bloomberg