Paulson Outlines Mortgage Aid Plan
Proposal Would Expand Help At Local Level

By David Cho and Neil Irwin
Washington Post Staff Writers
Tuesday, December 4, 2007

Treasury Secretary Henry M. Paulson Jr. unveiled new details of the Bush administration's mortgage-relief plan yesterday, including a proposal that would grant new powers to local governments to refinance the mortgages of struggling homeowners.

Paulson spoke publicly for the first time on the strategy that would temporarily freeze interest rates for many troubled homeowners or help them refinance, a plan that is gaining momentum among federal regulators, leaders of the mortgage and housing industries, and lawmakers of both parties as the mortgage crisis worsens.

Over the weekend Sen. Hillary Rodham Clinton (D-N.Y.) expressed support for freezing interest rates for financially strapped homeowners who have adjustable-rate loans and otherwise would face higher rates. And several key Democrats and administration officials are in agreement that a major regulatory overhaul of mortgage-backers Fannie Mae and Freddie Mac is needed to help them act as a buffer from the mortgage mess.

The impact of the mortgage crisis is widening. In Florida yesterday, state officials struggled to cope with investment losses stemming from an investment pool that holds subprime loans.

Paulson urged Congress to expand the role of local governments in helping homeowners. "Given the local nature of housing markets, state and local solutions can be particularly effective," he said.

Municipal housing authorities now offer mortgages at lower-than-average rates to credit-worthy, first-time buyers whose earnings are at or below the average household income levels, which vary by region. Cities and states can provide such advantageous loans because they sell tax-exempt bonds backing the mortgages to investors at lower rates, passing on the savings to homeowners.

The Treasury Department wants to expand the authorities' reach to include subprime-mortgage holders who want to refinance with a fixed-rate loan rather than an adjustable-rate loan.

While Paulson outlined the mortgage-relief plan only in broad terms yesterday, sources close to the discussions said major components are likely to be released later this week.

The lack of details has made it hard to know how many homeowners the plan would help. In the past two years, about 2 million credit-challenged, or subprime borrowers bought houses with mortgages that typically had interest rates of 7 to 8 percent. The rates on those adjustable loans are set to jump to as high as 11 percent by the end of next year. While some owners have refinanced, others have fallen into foreclosure. Government agencies say that as many as 1.2 million homeowners still need help, though independent research groups say the number is lower.

Either way, more assistance will be needed to overcome the mortgage crisis than just the administration's plan, which focuses largely on subprime borrowers, industry executives said yesterday. And it is not just subprime mortgage holders who could lose their homes, they said. People with home- equity loans and some holders of "prime" mortgages, those given to borrowers with good credit, have begun defaulting, Washington Mutual chief executive Kerry K. Killinger said.

Paulson acknowledged the administration's plan "is not a silver bullet."

"There is no single solution to address all of the issues currently affecting the housing and mortgage markets," he said. "Treasury is aggressively pursuing a comprehensive plan to help as many able homeowners as possible keep their homes."

Paulson's speech came at a national housing forum in Washington, where top economists joined government officials and industry leaders in painting a bleak picture of the real estate market. Many said the country's housing downturn would continue for several years, perhaps into the next decade.

"There is now a broad consensus that this is a very serious housing downturn that's not going to get better anytime soon," said Mark Zandi, co-founder and chief economist of Moody's Economy.com, who spoke on the opening panel at the forum. He said the country is experiencing the worst housing decline since the Great Depression when measured by three key data points: home sales, prices and housing starts.

The worst slumps are in California, Florida, Nevada and parts of the Washington region, especially Northern Virginia, Zandi said. Most of those areas have seen at least a 7 percent decline in housing prices from the beginning of the summer, he said, adding that a 20 percent decline overall is likely by early 2009.

Many homeowners with subprime loans could apply to freeze their rates or refinance their loans quickly under the deal being worked out by Treasury officials and the Hope Now Alliance, a coalition of consumer counseling groups, investors, nonprofits, and lenders such as Citigroup, Wells Fargo and Countrywide Financial.

The major sticking point is the investors who buy securities made up of subprime loans. For years, they provided the financial backing that allowed mortgage firms to expand their lending. No type of loan made more money for investors, or was as risky, as subprime mortgages, because they required homeowners with shaky credit to pay more interest.

If lenders agree to freeze 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.

"While the devil in the details, this is the first time the administration is devising a plan that meets the magnitude of the problem," said Sen. Charles E. Schumer (D-N.Y.). "If investors can be compelled to go along without long legal delay, it has the potential to make a real dent in the problem."

Paulson aims, in part, to give mortgage servicers -- the companies that homeowners send their checks to every month -- legal protection in case investors sue. The situation is doubly complicated because hundreds of mortgages are grouped into securities held by investors all over the world whose legal rights vary.

Christopher J. Mayer, who heads the Milstein Center for Real Estate at Columbia University's business school, said the Treasury Department's efforts will not necessarily be enough to prevent years of legal recriminations. "Everybody is going to end up suing everybody," he said.

Paulson's plan also faces a daunting task of figuring out who is eligible for mortgage relief, because many loans have little documentation of a homeowner's income, said Douglas W. Elmendorf, a senior fellow at the Brookings Institution.

"If you let everybody off the hook, that's not in the interest of the lenders," Elmendorf said.

Paulson said Congress needs to act quickly to fund a $170 million mortgage-counseling initiative that would beef up a national hotline where financially troubled mortgage owners could talk to credit counselors.

Whatever plan Paulson presents, "they are going to need the nonprofit community," said Kenneth D. Wade, chief executive of NeighborWorks America, who spoke at the housing forum yesterday.

As a result, counseling service NeighborWorks America expects to double its staff of 65 counselors by next month. Many counselors are already in training, said chief executive Kenneth D. Wade.

The group is part of the Hope Now Alliance of nonprofits and lenders, which is scaling up a hotline for homeowners concerned about their mortgages. The hotline has seen a spike to 3,000 calls a month from 300 almost a year ago, said Wade. Its number is 888-995-4673.

Staff writer Renae Merle contributed to this report.