New moves by finance giant Freddie Mac and a major lending institution involving billions in high-priced mortgages may mean that the urgings of regulators and lawmakers for help to distressed homeowners are bearing fruit. But the complexity of the mortgage business sets up a difficult balance between the goal of stemming foreclosures and the need to keep the market robust, experts said Wednesday.
Home-mortgage delinquencies and foreclosures have been surging in recent months, especially for people who took out subprime mortgages — higher-priced loans for people with tarnished credit or low incomes who are considered greater risks. The distress has roiled financial markets and stoked anxiety that it could spill over into the broader economy.
“This is a very, very difficult situation for which there are no easy answers,” said Bert Ely, a banking consultant based in Alexandria, Va.
Freddie Mac, the government-sponsored company that is the second-largest buyer and guarantor of home loans in the country, announced Wednesday that it will buy as much as $20 billion in fixed-rate and adjustable-rate mortgages to help borrowers with high-priced loans keep their homes. The new mortgages, expected to be available by midsummer, will include loans with longer fixed-rate terms.
Fannie Mae, the No. 1 mortgage financer, also is offering new options so that lenders can help subprime borrowers refinance out of high-interest adjustable-rate mortgages or other difficult loans. Fannie Mae estimates that some 1.5 million homeowners could be eligible — a plan that translates into tens of billions of dollars in purchases of subprime mortgages by the company, spokesman Brian Faith said.
And Washington Mutual Inc., one of the country’s largest financial institutions, said it will refinance up to $2 billion in subprime mortgages to help borrowers avoid default and foreclosure, allowing them to apply for discounted fixed-rate home loans or other refinancing alternatives. Subprime loans comprise only about 6 percent of Seattle-based Washington Mutual’s mortgage holdings, but they dealt a heavy blow to its first-quarter earnings, which slid 20 percent.
“We want to make sure we’re reaching consumers before they get in trouble,” said David Schneider, president of Washington Mutual’s home loan group. “What we’re ultimately trying to do is to make sure that as many customers as possible can stay in their homes.”
Schneider said he expects 10,000 to 15,000 subprime customers to take advantage of the program.
Especially precarious are the millions of adjustable-rate mortgages, known as ARMs, which are very prevalent in the subprime market. They are considered higher-risk loans because they typically draw borrowers in with an initial low “teaser” interest rate, which can spike upward after the first few years.
A homeowner who takes out a $200,000 ARM with a teaser rate of 4 percent, for example, initially pays $954.83 monthly in principal and interest. But when the interest rate jumps to 7 percent, say, in the second year of the mortgage, his payments rise to $1,320.59 a month — a move that regulators call “payment shock.”
Nearly 2 million ARMs are resetting to higher rates this year and next — setting up a potential wave of foreclosures that has put policymakers on edge.
Lawmakers in positions of authority in Congress are flatly ruling out the possibility of a government bailout to cover mortgage loans in default.
Sen. Christopher Dodd, chairman of the Senate Banking Committee, while stressing “that we want to do everything possible to avoid foreclosures,” said “I’m not interested” in a bailout plan. That “may do more harm than good,” said the Connecticut Democrat, who is seeking his party’s presidential nomination in 2008.
The moves by Freddie Mac and Washington Mutual came a day after federal regulators called on lenders to work with struggling homeowners unable to meet payments on high-risk mortgages.
“We can jawbone,” Sheila Bair, chairman of the Federal Deposit Insurance Corp., said in a telephone interview Monday.
At the same time, the sprawling complexity of the home-mortgage business complicates the picture and means that not all loans can be restructured. Increasingly in recent years, big financial institutions and Wall Street investment firms buy home loans in bulk from banks and other lenders and bundle them into securities to be sold and resold to investors, spreading the risk.
If a mortgage has been securitized and is not on a lender’s books, that lender often will need the consent of the ultimate holder of the loan. Around three-quarters of the estimated $600 billion in subprime mortgages taken out last year fell were securitized, according to Wall Street analysts.
“You’re dealing with all kinds of constraints — legal constraints, institutional constraints — and they’re not easy to work around,” Ely said.
Lenders “certainly are aware that mistakes were made” with subprime mortgages during the housing boom, said Jack Aber, a professor of finance at Boston University. Still, he said, it is preferable “to let markets do their work when they can” to remedy the situation.
Banks and other mortgage lenders repossessed more homes last month as many borrowers — mostly subprime — couldn’t keep up with payments, according to a survey conducted by RealtyTrac Inc. that was released Wednesday. Foreclosures in March spiked to 149,150, a 47 percent leap from March 2006, according to the survey. Lenders repossessed one out of every 775 homes in March.