A government proposal to freeze interest rates on millions of loans made to risky borrowers reflects political and financial realities of the housing market crisis, analysts say.
Until now, President Bush favored government restraint. But with investors losing millions as Wall Street banks write down billions of dollars in bad home-loan investments amid mounting concerns about economic stability, the White House is pressuring the mortgage industry to offer a sweeping fix for the problem.
The Bush administration is “willing to consider action that would have been inconceivable just weeks ago,” mortgage industry consultant Howard Glaser wrote in a research note.
That doesn’t mean the rate-freeze approach being promoted by Treasury Secretary Henry Paulson won’t face resistance from mortgage industry executives. And some on Wall Street warn of a flood of lawsuits if the government tries to coerce the owners of loans held in complex mortgage securities to focus on long-term rather than short-term returns.
“I don’t think (the Treasury plan is) being very well-received at all,” said Bert Ely, a banking consultant based in Alexandria, Va. “There are lots of legal issues here that they are not addressing that are in the minds of everybody who works on this stuff.”
Details of the Treasury plan, which could be formally unveiled later this week, stops short of a taxpayer-funded bailout for borrowers, an idea rejected by both Democrats and Republicans. Some specifics of the plan have trickled out, such as homeowners being given a break of two to five years if they are currently making payments on time but wouldn’t be able to do so when their mortgages adjust to higher rates.
Publicly, industry executives at a national housing conference sponsored by the Office of Thrift Supervision on Monday generally praised the concept.
Daniel Mudd, chief executive of government-backed mortgage finance company Fannie Mae called it a “positive step,” saying that many borrowers will be able to avoid foreclosure if they are given more time. “You need time to cure” the problems, Mudd said.
Yet it’s far from clear if they’ll sign on voluntarily although the industry’s willingness to take any government help is growing as they feel the fallout of the housing market bust.
“I’d be supportive of whatever it took for the industry to be on stronger footing,” said Kerry Killinger, chief executive of major lender Washington Mutual Inc.
Problems are starting to show up in loans made to homebuyers with strong credit records because real estate prices continue to slide, he added, saying he supports the central bank cutting interest rate cuts again as well as temporary expansions of Fannie Mae and Freddie Mac’s funding capacity.
Angelo Mozilo, CEO of Countrywide Financial Corp., said he also backs allowing Fannie and Freddie being allowed to buy bigger home loans and keep more of them on their books as a way to improve liquidity for the battered industry. The Bush administration has opposed such efforts backed by congressional Democrats.
“This is the time for (Fannie and Freddie) to step up to the plate and take action and try to bring liquidity back to the market,” Mozilo said.
Echoing the complaints of consumer advocates who have long pushed for mortgage lending reform, Robert Toll, chief executive of luxury homebuilder Toll Brothers Inc., said stronger restraints are needed to prevent a recurrence of today’s problems.
“We had mortgages available to the alive and standing and that was the only criteria,” he said. “There’s no reason why we can’t set limits.”
Toll also said home prices “may not have stopped falling yet,” but said buyers should take advantage of the opportunity to snap up houses at low prices.
Many analysts say the worst is yet to come. Banc of America Securities predicted in a report last month that the median U.S. home prices would fall 15 percent over the next four years and not rebound until 2012.
With $361 billion in subprime loans made to borrowers with weak credit resetting at higher interest rates next year, foreclosures will peak in the third quarter of next year and won’t drop back to more normal levels until 2011, Banc of America also estimates.
A widely circulated Goldman Sachs report last month said more than $100 billion in additional bank write-offs and losses are on the horizon due to bad mortgage investments. And it warned that credit card debt and auto loans could be the next sectors to suffer.
Most recently, government-sponsored mortgage companies Fannie and Freddie, normally thought to be bastions of stability in the mortgage industry, reported combined third quarter losses of more than $3 billion.
The severity of the industry’s losses help explain Bush’s recent change of heart, analysts say. In late August, President Bush said “the government’s got a role to play, but it is limited.” Then, in October, when Sheila Bair, chairman of the Federal Deposit Insurance Corp., floated the idea of freezing interest plan as a way to stave off foreclosures, the response from top Bush administration officials and Wall Street investors was tepid.
Since then, though, Paulson has warmed to the idea of more government involvement. On Monday, he called the rate-freeze plan a “pragmatic response.”