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Deal in the Works To Freeze Rates on Subprime Loans
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If mortgage lenders agree to freeze the loans at lower rates, investors would lose out on the higher payments promised under the original loans, which could give them grounds to sue the lenders. A key point of negotiation that remains unresolved is working out a solution for investors, who are being represented by the American Securitization Forum, that would convince them to give up their right to sue.
A person with knowledge of the deal, who spoke on condition of anonymity because the negotiations were ongoing, said Wall Street has been holding out but is moving closer to an agreement. Some investors are worried that without a deal, foreclosures would rise, which could cause confidence in the mortgage market to erode and leave their mortgage securities worth next to nothing.
"This is the first time that the Bush administration is working toward a solution that meets the magnitude of the problem," Sen. Charles E. Schumer (D-N.Y.) said. "But there is a $64,000 question: Will investors go along with this plan? And if not, can they be compelled to?"
White House spokesman Scott Stanzel said yesterday it was "premature to talk about those discussions at this point."
The talks were reported yesterday by The Wall Street Journal.
People involved in the dialogue said Treasury Secretary Henry M. Paulson Jr. and Housing and Urban Development Secretary Alphonso Jackson were key players in bringing together the alliance. Initially, Paulson was set on allowing lenders to help troubled homeowners on a case-by-case basis, but his thinking recently changed to a more systematic and faster approach.
While Paulson was exploring the issue, a key proposal emerged from Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corp. In early October, she advocated a permanent freeze in rates for financially strapped homeowners with subprime loans. She later became open to the idea of a five- to seven-year freeze.
The idea gained momentum. Last week, officials in California, where it is predicted that a quarter of the subprime loan resets will take place, announced a deal to temporarily freeze rates on some subprime loans issued by Countrywide, GMAC Financial Services, Litton Loan Serving and HomEq Servicing.
"Here are four big servicers saying it's feasible, it's a viable approach," said Andrew Grey, spokesman for the FDIC. "We were very encouraged by the progress that's being made."
