Possible rate freeze for struggling homeowners

Martin Crutsinger

WASHINGTON — Treasury Secretary Henry Paulson said Monday an agreement was near on a proposal to help thousands of at-risk homeowners avoid foreclosures by temporarily freezing their mortgage rates.

One of the last remaining issues to be resolved, officials said, was the exact length of time the low “teaser” rates will be frozen.

Speaking at a national housing conference and in later interviews, Paulson expressed optimism that an agreement could be reached very soon, possibly before the end of this week.

Paulson and federal regulators have been holding talks with some of the country’s biggest banks, mortgage investors and consumer groups trying to strike a deal in an effort to prevent an avalanche of threatened foreclosures in the coming year from sinking the overall economy.

“We are working aggressively and quickly, utilizing available tools and creating new ones, to help financially responsible but struggling homeowners,” Paulson said in a speech to a national housing conference sponsored by the Office of Thrift Supervision.

An estimated 2 million subprime mortgages, loans offered to borrowers with spotty credit histories, are scheduled to reset to much higher levels by the end of 2008. Those resets will push the payment on a typical mortgage up by $350 per month, taking it from the current monthly rate of $1,200 to $1,550.

Some government regulators are pushing for the low “teaser” rates to remain in place for five to seven years, arguing that a longer period of time is needed to allow the depressed housing market to begin recovering and for home prices to stabilize, which will allow homeowners to finance under better terms. But investors, who will see lower payments on the loans, are arguing for a shorter period of time.

Regulators indicated that the rate freezes will only be available for owner-occupied homes to avoid granting the break to real estate speculators although the exact way that determination will be made was still being worked out.

“How you structure [the rate freeze], who gets it and for how long, I think, is what people are struggling with,” Comptroller of the Currency John C. Dugan, told reporters at the conference.

The plan under consideration does not include any government funds, but it would mean losses for investors who purchased mortgage-backed securities because they would be getting a lower income stream reflecting the delay in having the introductory interest rates reset. But it would still represent more money than if the mortgage went into default.

The rising tide of defaults on subprime mortgages in recent months has already forced a number of major financial institutions to declare multibillion-dollar losses, a development that seriously roiled financial markets not only in the United States but also in Europe over the summer.

In his speech, Paulson said he believed the mortgage industry would move to implement the new program quickly and would also adopt benchmarks to measure progress going forward.

“As a result, what was a fragmented, cumbersome process can be a coordinated effort, which more quickly helps able homeowners,” Paulson said.

Banking industry executives generally praised the initiative. Daniel Mudd, chief executive at Fannie Mae, the nation’s largest provider of home mortgages, called the proposal a “positive step” that would allow many borrowers to avoid foreclosure.

The new program is being aimed at homeowners who have steady incomes and relatively clean repayment histories who could afford the lower introductory mortgage rates, but cannot afford the higher adjusted rate.

The rate freeze is part of an administration program that is also emphasizing increased efforts to contact at-risk homeowners and congressional action.

Paulson said the administration was asking Congress to pass legislation that would give state and local governments more authority to temporarily broaden their tax-exempt bond programs to include mortgage refinancing. Currently, such programs are limited to new homeowners but do not include the use of tax-exempt bonds to refinance existing mortgages.

Paulson also called on Congress to pass a number of pending bills that would address the housing crisis in such ways as expanding the availability of Federal Housing Administration insured loans and boosting government oversight of mortgage giants Fannie Mae and Freddie Mac.

The administration has come under criticism from Democrats, who have complained that the proposals put forward so far have been too modest in light of the crisis facing the housing industry and the threat that the housing slump could trigger a full-blown recession.

John Taylor, the president of the National Community Reinvestment Coalition, said he was concerned the government was moving too slowly to deal with the problem when what was needed was the major effort used to deal with the savings and loan crisis of the early 1990s.

“This is a major problem that is pushing us towards a recession,” Taylor said.

The Rev. Jesse Jackson said the administration’s plan did not go far enough. He said his Rainbow/PUSH Coalition will stage protest marches on Wall Street in New York and in 50 other cities around the country on Dec. 10 to prod the government to play a bigger role, similar to what was done during the savings and loan crisis of the early 1990s.

“This is an economic tsunami,” Jackson said. “We need Wall Street and the banks and the government to work together for a public-private partnership like we did for the S&L crisis.”

The administration is working through an industry coalition, dubbed Hope Now, to get the new program launched. Elements of the program are expected to be modeled after an approach put forward several months ago by Sheila Bair, the head of the Federal Deposit Insurance Corp. Last week, California announced a similar effort involving four major loan servicing companies.

In Massachusetts, Gov. Deval Patrick signed legislation last week designed to offer much needed relief to existing homeowners.

“This legislation is a critical step in protecting homes, families and communities throughout the Commonwealth,” said Patrick. “These reform measures will give the Commonwealth and its citizens some of the tools necessary to fight the surge in home foreclosures and unfair lending practices.”

The new statute creates a centralized statewide foreclosure database to monitor and analyze foreclosures at the Division of Banks, and mandates that mortgage holders file a 90-day notice of intent to foreclose with both the homeowner and the Division of Banks. Further, the bill requires mortgagees to receive consumer counseling prior to obtaining nonconforming variable rate mortgage loans.

“This new law will help protect homebuyers from predatory lending and bring meaningful assistance to those facing foreclosure,” said House Speaker Salvatore F. DiMasi, D-Boston. “This problem is only going to get worse, so acting now with this bold measure is critically important.”

Provisions of the law include:

• Extending $2 million in grants to establish 10 education centers around the Commonwealth and promote first time homebuyer and foreclosure counseling;

• Granting tenants of foreclosed properties additional tenant-at-will rights;

• Requiring every mortgage to have endorsed on it the name, address and license number of the mortgage broker and mortgage originator, if applicable;

• Mandating an accounting of the disposition of the proceeds of a foreclosure sale to a foreclosed consumer, including whether there is any surplus due to the consumer or if any deficiency remains.

“This legislation is a comprehensive effort to provide borrowers with the educational information they need before entering into a mortgage,” said state Rep. David Torrisi, D-North Andover. “It also ensures that the standards that honest lenders already meet are followed by the entire lending industry.”

(Associated Press)