WASHINGTON — If foreclosure rates continue to rise and the volume of loan modifications does not pick up dramatically, policymakers may be forced to devise another, more comprehensive solution than the rate-freeze plan the Bush administration is expected to unveil today.
That's the consensus among industry insiders who helped the administration patch together what is widely viewed as a first step toward resolving the growing mortgage crisis.
President Bush is expected to explain the plan today, but sources cautioned it was still being negotiated late Wednesday and could change. Targeting roughly one-fifth of the 1.5 million subprime, adjustable-rate mortgages due to reset soon, only borrowers less than 30 days delinquent on a hybrid mortgage originated between Jan. 1, 2005, and July 31, 2007, due to reset in three years, would be covered.
To gain the industry's support, that group was further constrained to people with less than 3% equity in their homes, FICO scores below 660, and facing payments that would jump by more than a certain percentage, which had not been set as of late Wednesday. Borrowers who had been more than 60 days delinquent in the past 12 months also would not qualify.
"I do not think this is the last and final solution unless the real estate market comes back and servicers really prove they can do this loan-by-loan," said one banking industry source, "and I don't think either of those are likely."
"It sets the tone for [the] future, but in and of itself it's not going to have a big impact," said another industry source. How much more the government is forced to do will "depend on how much more housing markets deteriorate and what the jobs picture looks like."
Some oppose the administration's efforts to prevent interest rates on these loans from re-setting.
"By creating a windfall, they are creating a windstorm that will destroy the housing market," said New York Community Bancorp. chairman and CEO Joseph R. Ficalora. "And that storm could be catastrophic if it goes to the full extent of what some of these proposals are, where we have a change in law that allows for massive numbers of people not to make their payments, where … we're going to dictate that your rate is going to be lower than you contracted? What does that do to the secondary market?"
"This is pushing the pedal on a broken car. This might work for the first 50 miles and then the same group might have to get together later to retune the engine and get the car going," said Jim Vogel, the head of fixed-income research at First Horizon National Corp.'s FTN Financial Capital Markets Corp.
Still, plenty of lenders applauded the administration for bringing pressure to bear and forging a consensus with some flexibility.
Another executive at a large banking company said the plan "buys time for the marketplace to come up with a rational way of dealing with" resets. "It is extremely significant to the individual borrowers," the executive said, but "how significant it is to the broader credit market crisis is hard to tell. This is a very narrow slice."
The plan is to be discussed in further detail by Treasury Secretary Henry Paulson and banking regulators after being unveiled by the president.
Anne Canfield, the executive director of the Consumer Mortgage Coalition, emphasized that this is an important step but only a first step.
"This seems to be the first step in what will hopefully be a more comprehensive plan," she said. "The next step must be aimed at getting liquidity back into the marketplace for subprime loans."
Servicers are worried that investors may sue if mortgages are modified. Sources said they do not expect the Bush administration to offer any kind of safe harbor from litigation. Instead, the plan will emphasize that the administration believes the modifications are legal under existing pooling and servicing agreements.
Industry representatives are expected to back the plan, though many say they are still nervous about potential lawsuits.
"We want to be assured … that they take care of the liability and the tax ramifications of making these broad modifications," said Erick Gustafson, vice president of government affairs at the Mortgage Bankers Association.
The plan would call on lenders and servicers to make new disclosures on 28 reporting items. Sources said these include how many modifications were made, their terms, and whether the modifications included forgiven interest and principal.
