Rescue plan questioned

Analysts predict mortgage freeze would help few

December 04, 2007|By New York Times News Service

WASHINGTON -- The Bush administration's effort to help borrowers in danger of defaulting on their subprime mortgages could help only a small number of those who took out such loans, industry analysts said yesterday.

Though administration officials have yet to agree on crucial details with mortgage lenders and the securities industry, a similar effort in California is likely to help about 12 percent of borrowers in the state with adjustable-rate subprime loans, according to estimates by Barclays Capital.

About 2 million people have subprime mortgages with monthly payments that are likely to rise sharply in the next year or so as their introductory teaser rates expire.

Yesterday, Treasury Secretary Henry M. Paulson Jr. said he hoped to reach agreement this week with lenders and institutional investors on a plan to temporarily freeze the teaser rates for certain qualified borrowers.

Speaking at a housing conference here organized by the Office of Thrift Supervision, Paulson said he wanted to "develop a set of standards" for modifying subprime loans that the industry could use to speed up decisions on the hundreds of thousands of borrowers at risk of losing their homes.

But industry analysts and executives were skeptical about the government's ability to produce a high-speed approach to handling thousands of cases with a few simple principles.

"There is no cookie-cutter approach that can be taken to this," said Bert Ely, a longtime banking consultant in Alexandria, Va. "This is going to be a mess."

To qualify for help, Paulson said, borrowers would have to be current on their payments and would have to be able to keep making payments at the introductory rates. Borrowers would not qualify if they were able to manage the higher payments or refinance with a cheaper mortgage.

Under the approach Paulson outlined, deciding who would qualify for a loan modification would require a close assessment of each borrower asking for help. The easiest issue to determine would be whether a person has stayed current on monthly payments. The loan-servicing company would then have to estimate how much the person's payments were likely to increase once the teaser rate expired.

Analysts estimate that payments on many mortgages will increase 30 percent or more.

To decide whether a person qualifies for an extension of the teaser rate, a lender or a loan-servicing company would have to analyze the borrower's monthly income and expenses to determine if he or she could realistically make the higher payments.

"The risk is that you could be modifying loans for people who don't need it," said Sharon Greenberg, the director of mortgage strategy at Barclays. "There's only so much you can do without talking to the borrower."

As a result, Greenberg said, loan-servicing companies would have little choice but to look at the details of a person's monthly expenses, down to items as specific as cable television bills.

She predicted that the California loan-modification program, supported by Gov. Arnold Schwarzenegger, would lead to very little change from what big mortgage lenders were doing.

John Taylor, president of the National Community Reinvestment Coalition, said the rate freeze would help, but that its impact would depend on the extent to which Wall Street investment firms pushed the idea among investment funds that held mortgage-backed securities.

Nevertheless, Paulson's decision to push banks and Wall Street firms toward a blanket approach on subprime loans represented a big shift in his thinking and from the Bush administration's hands-off approach to financial markets.

Paulson emphasized that the new plan would not entail spending tax money. He also made it clear that the Treasury Department was pushing participants to act decisively.

It remains unclear how tough the implied mandate will be.

Paulson did not disclose how long the temporary rate freeze would last, a crucial point of disagreement in talks between the government, loan-servicing companies and the groups representing investors in mortgage-backed securities. The discussions appear to have centered on a freeze of three to five years.

Paulson also announced that the administration was proposing giving states and localities temporary authority to issue tax-exempt mortgage revenue bonds to help people refinance out of subprime mortgages.

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