Several major participants in the home mortgage market have agreed to adopt a set of principles for dealing with homeowners with high-priced loans who face possible foreclosure, the chairman of the Senate Banking Committee said Wednesday.
Sen. Christopher Dodd, D-Conn., had urged such voluntary action by mortgage lenders and other players two weeks ago when he convened a meeting of their officials and federal regulators to discuss possible solutions to the crisis gripping the market for high-risk loans. Such industry initiatives are preferable, in Dodd’s view, to any government bailout to cover mortgage loans in default.
Those agreeing to the principles include the Mortgage Bankers Association; Wall Street powerhouses Citigroup Inc., JPMorgan Chase & Co. HSBC Holdings Corp. and Bear Stearns & Co.; government-sponsored mortgage finance giants Fannie Mae and Freddie Mac; AARP; and the Leadership Conference on Civil Rights. Several activist and community groups receive money from financial institutions and work with homeowners to refinance high-rate loans.
Among the principles are: contacting distressed borrowers promptly to try to work out arrangements; making loans more affordable by reducing rates, changing terms and other means; and providing refinancing at the lowest cost possible for those who are eligible.
“These principles represent a critical step in preserving homeownership and economic opportunity,” Dodd said in a statement. “The companies and organizations that endorse these principles demonstrate their commitment to being part of finding solutions to foreclosures.”
Some companies that participated in the April 18 meeting, however, including Countrywide Financial Corp. and Wells Fargo & Co., did not endorse the principles.
Home-mortgage delinquencies and foreclosures have surged 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.
Especially precarious are the millions of adjustable-rate mortgages, known as ARMs, which are 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.
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.
Fannie Mae and Freddie Mac, the two biggest players in the $8 trillion home-mortgage market, recently committed to buy tens of billions of dollars of high-interest mortgages so that lenders can help strapped borrowers refinance and avoid foreclosure.