Mortgage Rate Freeze Talks Happening

From Reuters:

WASHINGTON – Mortgage industry executives are working to hammer out details of a homeowner rescue plan that would freeze interest rates on some U.S. sub-prime mortgages for up to seven years, but questions remain over how to avoid investor lawsuits and other legal challenges.

The negotiations among lenders, servicers, investor groups, regulators and other parties were aimed at allowing US Treasury Secretary Henry Paulson to announce a framework for the plan on Monday, with full details expected on Wednesday, said a mortgage sector source involved in the talks.

Mr Paulson on Friday said the mortgage industry was working with the Treasury on a broad plan to help save the homes of sub-prime borrowers with adjustable-rate mortgages who cannot afford higher payments as their interest rates reset in coming months, but who otherwise could afford to stay in their homes.

The plan’s details are now up to the mortgage industry and investors, the two groups that will have to absorb its costs.

“The message is that everybody has to get on the bus,” the source said of Mr Paulson’s directive.

Details over which mortgages would be considered for an automatic interest rate freeze of five to seven years are still sketchy. The source said that initially, only sub-prime loans with two- or three-year periods of low “teaser” rates would be considered, but more traditional sub-prime loans with longer fixed-rate periods could also be modified.

A shorter freeze period was initially considered, but Federal Deposit Insurance Corp. Chairman Sheila Bair pressed in the negotiations for a five- to seven-year freeze. Ms Bair was the first federal regulator to propose a broad rate freeze as California negotiated a similar deal with several top mortgage lenders in the state, hard-hit by the housing downturn.

Estimates of mortgage resets vary. Federal Reserve officials estimate that 2 million mortgages face resets and as many as 500,000 of these could lose their homes.

Deutsche Bank said in a report on Friday that the population Mr Paulson’s plan is aimed at — owner-occupants with at least some equity and facing their first reset — comprises 1.2 million loans valued at $US258 billion, or one third of outstanding “first-lien” sub-prime loans.

(more)

But not all agree that this leads to a rosy situation, especially for investors involved in the securitization of loans. Forbes reports that any attempts to freeze sub-prime interest rates could lead to investor protests:

One obvious problem with the proposal is that in many cases, the sub-prime loans in question have already been securitized and sold to investors. And many of these investors could oppose efforts to modify these loans, which are their investments.

‘The banks don’t own the loans anymore,’ Harm Bandholz of Unicredit said. ‘Even if the lenders agree, there could be lots of lawsuits.’

But there seems to be flexibility among lenders who, of course, are not wanting foreclosures en-masse:

Blackwell testified in California [Friday] that about 3 pct of the 7.9 m loans backed by Wells Fargo are sub-prime adjustable rate mortgages, and said most of these can be modified.

‘At this time, it appears that we can find workable solutions for the vast majority — 80 to 88 pct — of these loans,’ he said.

Michael Albon, Senior Vice President of Washington Mutual said in testimony for the same hearing that his company has modified 720 mln in loans so far.

Ongoing discussions on how to help struggling homeowners are taking place under the Hope Now Alliance, a group of mortgage servicers, counsellors, and non-profit groups that were brought together by Paulson.

Surprisingly, the plan is gaining support from unexpected places…

The outline of the Bush administration plan won praise from a diverse spectrum. Paul Krugman, the liberal New York Times columnist, offered “kudos to the Bush administration” on his blog, saying that while he needed to see more details, “It seems that [Treasury Secretary] Henry Paulson is being much more proactive on the housing mess than I expected.”

House Financial Services Chairman Barney Frank, a Massachusetts Democrat, offered legislative help for the large-scale modification of loans, saying he was “encouraged by reports of progress” in efforts to help borrowers who are in danger of losing their homes.

(more from the Wall Street Journal)