WASHINGTON — As negotiations continue on possible ways to modify thousands of mortgages to head off foreclosures — and most sources agree a deal is likely — a wide gap remains between what the industry says is workable and what the Bush administration wants to deliver.
As much as all the parties, from government officials to industry executives to consumer activists, are articulating the need for some kind of consensus solution, there are still differences on fundamental details. Industry representatives are continuing to advocate for loan-by-loan modifications, and seeking safe harbor from investor lawsuits. The administration, on the other hand, is talking of systematic restructurings without guarantees to guard against losses.
Though lenders were quick to express solidarity with the government on Monday, few seemed swayed, leaving the effort's ultimate outcome in doubt.
James Montgomery, the former chairman of Great Western Financial Corp., which Washington Mutual Inc. bought 10 years ago, said a top-to-bottom approach would not work.
"I like what" Treasury Secretary Henry "Paulson is trying to do, but frankly it's just not practical," Mr. Montgomery said.
There should be a bottom-up approach where community banks take the lead in trying to identify local properties that can be saved from foreclosure, he said; bankers could purchase a loan at a discount from a master servicer and take over the loan, giving the borrower a more affordable rate. But even in that scenario, he cited a problem: Master servicers would have no incentive to sell the loan at a discount.
"We gotta do it loan by loan, and community banks are well situated to do this, but it's hard to track down servicers to buy the loan from them," he said. "A lot of servicers are out of business, and those that aren't have no incentive to sell the loan. Servicers make money on foreclosure."
Mr. Paulson acknowledged Monday that broad loan modifications would be difficult to accomplish. "Given the diffuse nature of today's mortgage market, the steps toward refinancing and modification can be more difficult than it would seem," he said in a speech at the Office of Thrift Supervision's housing forum.
Details of the Paulson plan are still being hammered out, but President Bush is expected to announce a broad outline of an agreement this week.
Under the plan, initially reported last week by American Banker, lenders and servicers would agree to freeze interest rates on nondelinquent subprime hybrid mortgages scheduled to reset soon.
But industry representatives said that even identifying which borrowers would fall into that category would be hard and would require a loan-by-loan analysis.
"Ultimately, it is an individual loan, and each person has different circumstances, so it's hard to place people in categories without helping people who don't deserve it and not helping people who do," said James Chessen, chief economist of the American Bankers Association.
Some bankers express support for the concept of broad modifications and seem anxious to reach an agreement with Mr. Paulson, though even they say it would not solve all problems in the overall market.
"It's not a simple solution of just 'We'll take care of subprime modifications,' " Kerry Killinger, Wamu's chairman and chief executive officer, said at the OTS conference.
"Yes, that is something we can do. But this is really about what are we going to do to get liquidity back into the marketplace? What are we going to do to help the nonconforming market? What are we going to do for the subprime market?"
There were some new ideas tossed into the mix Monday. Mr. Paulson called for legislation that would let state and local governments broaden their tax-exempt bond programs to include mortgage refinancings. That idea won support from several quarters.
"We believe it will give housing finance agencies a tool to help at-risk borrowers in this time of mortgage market uncertainty," said Kieran P. Quinn, the chairman of the Mortgage Bankers Association.
But industry representatives continued to worry about the practical difficulties of agreeing to broad modifications.
Industry representatives invariably cited investors as the constituency that broad modifications would alienate. "Would you like if you were holding a security that's supposed to get 100 cents to the dollar when you pay for that, and someone forces down your throat that you get 70 cents on the dollar? Would you pay again?" Angelo Mozilo, Countrywide Financial Corp.'s chairman and CEO, asked Bert Ely after the independent analyst asked him to comment on liability and other concerns at the OTS conference.
When Mr. Ely responded, "No," Mr. Mozilo said, "Well, I happen to agree with you."
Mr. Paulson acknowledged the practical challenges posed by such an approach.
"The company collecting your mortgage payment every month is most often doing that on behalf of those who own the mortgage, and they are limited in the decisions they can make on behalf of those ultimate owners, who are spread all over the world," he said.
Several industry representatives are pushing for some type of safe harbor for any modifications.
Rep. Mike Castle, R-Del., has introduced a bill that would provide a six-month harbor from investor lawsuits for servicers who modify loans. The House Financial Services Committee plans to hold a hearing Thursday on the legislation and loan modifications.
Industry representatives also would like the Treasury Department to outline standards for a loan that should be restructured — a defense the industry could use against lawsuits.
"Treasury needs to set standards for demonstrating net benefit for restructuring," Mr. Chessen said.
Mr. Mozilo said Countrywide has made progress with its own modifications. He said his company has reworked 55,000-60,000 loans this year and expects to have 75,000 restructurings by yearend.
Regulators continue to say changes should be made systematically. OTS Director John Reich said Monday that he expected the ultimate agreement to ask servicers to extend rates for three to five years.
"There is a convergence among the regulators towards a loan modification plan that would attempt to reach as many homeowners as possible who have demonstrated their repayments at their starter rates, in an attempt to try to accelerate the modification of those loans," he said. "One of the discussions has been the period of time those loans would be modified, and I think there is convergence there."
Comptroller of the Currency John Dugan said in an interview that the time frame is still being nailed down. "There are still issues about what are the criteria for the pool that would be eligible for this temporary delay on the interest rate and how long it would be," Mr. Dugan said.
Mr. Paulson said a loan modification plan would stop only some of the pending foreclosures.
"I'm optimistic that we will have something to announce before the end of the week," he said in an interview on Bloomberg Television. "I want to emphasize one very important point here. This is not a silver bullet. This plan in and of itself is not going to deal with all of the problems associated with the housing market and bad lending practices."
