Most of the mortgage bigwigs were in Washington, DC on Monday, attending the National Housing Forum sponsored by the U.S. Office of Thrift Supervision. While the meeting had been scheduled for months, the timing could not have been better as all eyes have been focused on a possible limited bail-out of bankers, servicers, and borrowers caught up in rate adjustments and other problems arising out of the subprime mortgage mess.

Speaking at the Forum, Secretary of the Treasury Henry Paulson commented on an attempt involving the government and private sector players to reduce what is expected to be a huge number of foreclosures over the next year or so.

While insisting that the underlying economy is strong - a statement apparently required in all speeches by officials of this administration - Paulson stated that the housing market downturn is the biggest challenge facing that economy.

Given the cost to individuals, lenders, and whole neighborhoods and communities of the rising number of foreclosures, Treasury, he said, is pursuing a plan to help as many able homeowners as possible to avoid foreclosure "when a homeowner has the financial wherewithal to own a home."

Treasury began the effort by convening a diverse group of market participants, who represent all segments of the mortgage industry. Based on what we have learned Paulson said, the participants are implementing a three point plan to avoid preventable foreclosures and to minimize the impact of the housing downturn on the U.S. economy.

First, efforts will be increased to reach able homeowners who are struggling with their mortgages. This means reaching them early and giving them both information and hope. The need for this became clear based on data showing that 50 percent of foreclosures happen in the absence of any discussion between borrowers and their lenders. In order to make a difference, that percentage must be reduced.

"We learned that mortgage industry leaders had already stepped-up their efforts to reach delinquent borrowers, but many borrowers in trouble were afraid to speak to their lenders. Borrowers did respond more favorably to mortgage counselors, but the counselors didn't know which borrowers most needed assistance. Treasury and HUD helped bring these two groups together in the HOPE NOW alliance - a coalition of mortgage servicers, counselors and investors that are working to avoid preventable foreclosures and to improve the functioning of the mortgage markets."

Paulson said that in the less than two months since it was formed, HOPE NOW has made significant progress. Members are now contacting borrowers 120-days before any scheduled rate reset rather than only after a loan falls several months delinquent. Where borrowers cannot be reached HOPE NOW has launched a nationwide letter campaign which offers a toll-free hotline that homeowners can call to explore their options.

The second step is to increase the availability of affordable solutions for borrowers in trouble. The mortgage industry is looking at solutions such as loan modifications and refinancing. At the same time, state and local governments are also developing solutions including proposing funds that will help some borrowers to refinance out of expensive subprime loans.

Paulson said that current law allows states and local governments to issue tax-exempt bonds to assist first-time homebuyers or buyers in economically distressed areas. The administration is proposing to allow these state and local agencies to temporarily broaden their tax-exempt tax authority to include mortgage refinancings which, if successful, will reduce the cost of innovative mortgage programs and allow them to reach more homeowners.

The Treasury Secretary urged Congress to pass several administration initiatives to provide mortgage relief including passing the President's Federal Housing Administration (FHA) modernization proposal which will lower the required down payment, increase the loan limit, and allow risk-based loan pricing. He estimated that passage of this bill would help refinance some 200,000 homeowners into FHA-insured loans.

He also touted HUD's "FHASecure" program which gives FHA the flexibility to assist even those homeowners who have basically good credit but have fallen delinquent on existing loans. He estimated another 240,000 families will be able to benefit from this program.

The third step that government and industry must take, according to the Secretary, is to develop a systematic solution for transition into affordable mortgages. As the number of struggling homeowners increases as is expected over the next year, the industry will need an aggressive and systematic way to fast-track borrowers into a refinance or mortgage modification. He hastened to add that "this third element does not, and will not, include spending taxpayer money on funding or subsidies for industry participants or homeowners."

Paulson identified, with a broad brush stroke, four categories of subprime borrowers:

  • those who will be able to afford their adjusted interest rate and will need no assistance;
  • those who are already behind on payments under the original loan terms and may not be able to sustain home ownership;
  • those who might choose to refinance their mortgages, putting themselves in a mortgage they can afford while at the same time keeping the investors who own their current mortgages whole. This is the best solution and servicers should move to assist those who can qualify.
  • The fourth category is those with steady incomes and relatively clean payment histories who could afford their initial mortgage rate but not the higher adjusted rate. We are, he said, focusing on this group, determining who they are and what steps may appropriately assist them.

The Secretary stressed that the company who collects the mortgage payment every month is usually limited in the decisions it can make because the loans are owned by others who may, in this global economy, be spread all over the world. He said that the administration is determined to develop a set of standards that can be implemented across the industry.

So, will it work?

Industry officials attending the forum were generally upbeat but tomorrow we will look at some of their responses, why the administration is now moving to address the mortgage issues, and address some of the systemic problems that are going to make the proposed solutions difficult to achieve.

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