Treasury Secretary Paulson Works With Mortgage Industry on Home Loans

WASHINGTON (AP) - Treasury Secretary Henry Paulson and federal banking regulators are working out the details of a plan to extend lower, introductory interest rates on home loans before they reset at higher levels.

Paulson and the regulators met Thursday morning with loan servicing companies — which collect and distribute loan payments — and other industry executives. A formal agreement had not yet been announced as of Thursday, but could be unveiled early next month.

“We’ve all agreed that there should be some sort of standardized approach to reaching more homeowners faster,” said Treasury Department spokeswoman Jennifer Zuccarelli, who declined to name those at the meeting.

Among the executives at the meeting were David Lowman, head of JPMorgan Chase & Co.’s home lending business and Michael Held, a division president with Wells Fargo & Co.’s home mortgage unit, company representatives said.

The mortgage industry and federal regulators have been under intense pressure from activists, lawmakers and consumer groups to help borrowers stave off foreclosure, particularly as adjustable-rate mortgages begin to reset, meaning much higher payments.

Last week, California officials announced a deal with four major loan servicing companies.That agreement with Governor Arnold Schwarzenegger includes Countrywide Financial Corp., GMAC Financial Services, Litton Loan Serving and HomEq Servicing.

There are an estimated 2.3 million borrowers with poor credit records whose home loans are projected to reset at higher rates through the end of next year. There are fears many of those loans risk default, worsening the nation’s soaring foreclosure rate.

Federal regulators have developed differing proposals for what to do about the problem. Sheila Bair, chairman of the Federal Deposit Insurance Corp., has been urging mortgage servicing companies to agree to widespread, permanent conversions of adjustable-rate loans to fixed-rate loans for homeowners who are current on mortgage payments but unable to afford loans at higher rates.

However, Bair’s proposal met resistance from the industry. Critics say companies would face lawsuits if they permit modifications that are not in the best interest of investors.

Last week, John M. Reich, director of the Office of Thrift Supervision, the federal regulator of the nation’s savings and loans, came up with a more modest proposal in which borrowers would get a three-year extension of low initial “teaser” mortgage rates. That plan,would be funded from surpluses in mortgage-backed securities.

Reich, who attended Thursday’s meeting was “encouraged with the progress being made toward finding a balanced approach that will help people stay in their home without negatively affecting the markets,” said a spokesman for the agency, William Ruberry.

Bair also attended the meeting and was “encouraged with the progress,” said spokesman Andrew Gray.

One potential area for compromise would be to allow the teaser rates to be extended for five to seven years. That could give borrowers enough of a breather to shore up their finances and ultimately refinance into traditional, 30-year fixed-rate loans.