- The Washington Times - Tuesday, December 4, 2007

The Bush administration, faced with criticism for doing little to stop a rapidly unfolding mortgage crisis this year, is working feverishly behind the scenes with lenders on a plan that could forestall a tidal wave of foreclosures and defaults next year.

Treasury Secretary Henry M. Paulson Jr. yesterday said he is confident that the industry will agree on measures this week that should enable the majority of an estimated 1.5 million subprime borrowers to keep their homes and avoid foreclosure when their mortgages reset.

Wall Street has rallied in recent days in anticipation of what could be substantial relief for borrowers and investors. The plan outlined by regulators would enable subprime borrowers who have kept up with their loan payments during the low introductory-rate period to avoid scheduled increases in their payments for three to seven years. The rate freeze could help up to 80 percent of subprime borrowers, analysts say.

Mr. Paulson stressed that the program will alleviate the greatest risks facing the economy and prevent the default crisis from worsening while providing a fair way out of the loan crunch for borrowers and investors.

“When home foreclosures spike, the damage is not limited only to those who lose their homes. Homes in foreclosure can pose costs for whole neighborhoods,” Mr. Paulson said. But, he added, the Treasury plan “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,” he said.

Sen. Hillary Rodham Clinton, the Democratic presidential front-runner, yesterday moved to pre-empt the Treasury announcement by calling for a five-year freeze on introductory rates for subprime borrowers. Saying the Treasury plan does not go far enough, she also called for a 90-day moratorium on foreclosures — a more radical measure that would meet strident opposition from the mortgage and securities industries.

“It is critical that we address this crisis,” the New York Democrat said in a letter to Mr. Paulson. “The administration and the mortgage industry must reach agreement that matches the scale of the problem. If you produce an inadequate agreement, or fail outright, the cost to our economy will be incalculable.”

Although Mrs. Clinton proposed greater government intervention than the administration did, she would not impose extensive new regulations on the mortgage industry as would one of her rivals, former Sen. John Edwards. The North Carolina Democrat is proposing to ban loans with balloon payments and steep prepayment penalties while barring lenders from earning lucrative fees for steering borrowers to costly subprime loans.

Leading Republican candidates former New York City Mayor Rudolph W. Giuliani and former Massachusetts Gov. Mitt Romney appear to favor no regulation at all and so far have offered only tax incentives to keep borrowers and the economy afloat.

Mr. Paulson came to support stricter regulation of the mortgage industry as well as substantial Treasury intervention in the credit markets in the past two months after it became clear that rapidly rising defaults on subprime mortgages could turn into a flood of red ink next year. That is when mortgages made at the height of the housing boom in 2006 come due for rate increases — typically as high as three percentage points on an 8 percent loan.

“The government has a role to play,” Mr. Paulson said. “Our plan involves a pragmatic response to the reality that the number of homeowners struggling with their resetting subprime mortgage will increase throughout 2008.”

The program also recognizes that while innovation in the mortgage industry helped many marginal borrowers move from renting to owning homes, it also led to today’s problems by making “riskier loans — with no down payments or minimal documentation — more widely available,” he said.

Mr. Paulson stressed that the program “will not include spending taxpayer money on funding or subsidies for industry participants or homeowners.” The cost of the plan will be borne largely by banks and investors holding the subprime loans.

Some subprime borrowers will not be eligible for the rate freeze, he added, including those who defaulted on the loans during the introductory rate period and those who have enough income to make the higher payments when their mortgages reset. Those represent a minority of subprime borrowers, according to the Federal Deposit Insurance Corp.

For the “vast majority” of borrowers who are current on their introductory payments, the FDIC said, regulators are working with lenders to develop a streamlined procedure that would enable those borrowers to maintain their loans at those rates for several more years. To be effective and avert lawsuits by disgruntled investors, “an industrywide approach is critical,” Mr. Paulson said.

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