Deal in the Works To Freeze Rates on Subprime Loans
Saturday, December 1, 2007
Mortgage rates for homeowners with spotty credit histories would be temporarily frozen under a nearly completed agreement between top Bush administration officials and a broad alliance of Wall Street's biggest banks, mortgage investors, nonprofits and consumer groups.
The plan, which could be announced next week, is designed to prevent soaring mortgage delinquencies from escalating into a full-blown foreclosure crisis that would threaten the broader economy, according to several people involved in or familiar with the discussions.
The agreement focuses on aiding many of the 2 million credit-challenged, or subprime, borrowers who, at the peak of the real estate boom in 2005 and 2006, bought houses with mortgages that offered low teaser rates that rise after the first two or three years of the loan. By the end of next year, about 500,000 people are expected to lose their homes because they cannot meet the new, higher monthly payments, federal housing officials said.
Homeowners could apply to freeze their rates or refinance their loans quickly under the deal being worked out by Treasury officials; the Hope Now Alliance, a broad coalition of consumer counseling groups, investors, nonprofits such as Homeownership Preservation Foundation; and lenders such as Citigroup, Wells Fargo, and Countrywide Financial.
Important details still need to be worked out, but the proposal gained traction yesterday in Washington and on Wall Street, where the stocks of nearly every mortgage-related firm rose sharply after reports about the deal surfaced. Shares of Countrywide, the nation's largest mortgage lender, soared 16 percent, as investors hoped the plan would smooth out the credit crunch and return normality to the lending business.
A potential sticking point is determining which homeowners would qualify for the help and how much they would have to pay to refinance or freeze their loans, several sources close to the discussion said.
Barry Glassman, a senior vice president at Cassaday and Co., a financial planner in McLean, said any plan that bails out only a segment of homeowners would raise questions of fairness.
"The big challenge will be figuring out who this affects and who gets this help," he said. "Where do we cut it off? Who's the person next in line that doesn't get the bail out? That's the most difficult question."
Those involved in the deal said alliance members were aware that some homeowners, no matter how much aid they receive, might never be able to afford their homes. They also do not want to help real estate speculators. The aim would be to reach homeowners who, with lower interest rates, could keep up their monthly payments.
Most borrowers with questionable credit got subprime rates of 7 to 8 percent in 2005 and 2006, federal housing officials said. When the rates reset, they could rise to 10 percent or more. An interest rate increase to 10 percent from 7 percent on a $200,000 loan increases monthly payments by more than $400, to $1,755 from $1,331.
People involved in the discussions said mortgage investors represent another huge hurdle. For years, this group provided the financial backing that allowed mortgage firms to expand their lending activities.
After a mortgage is originated, it is given a rating based on the credit of the homeowner and is sold in a package of similar loans to investors, mutual funds, and banks on financial exchanges throughout the world. No type of loan made more money for investors, or was as risky, as subprime mortgages because homeowners ended up paying more interest.