- The Washington Times - Tuesday, April 17, 2007

Housing finance agencies told legislators yesterday they are trying to arrange safe mortgages for millions of people who could lose their homes because of ballooning loan payments, but legal constraints may prevent them from stopping foreclosure on many homes.

At the same time, bank regulators warned against trying to rewrite mortgage finance laws in ways that hurt investors and dry up funding that supports the housing market, although they said investors who made risky loans possible in the first place should be forced to bear some of the losses from today’s rash of defaults.

The testimony before the House banking committee came amid a doubling of home foreclosures since last year, and calls from some in Congress for a moratorium on foreclosures as well as taxpayer-financed bailouts for vulnerable borrowers like minorities and people in states like Ohio where manufacturing job losses have contributed to delinquencies.

Freddie Mac, Fannie Mae and the Federal Housing Administration testified that they are preparing to offer more lenient loan terms for hard-pressed borrowers who would like to refinance into safer, long-term mortgages with fixed interest rates. But they cautioned that there is little they can do to help those who used fraudulent means or extremely lax lending standards to buy homes they could ill afford in the first place.

Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC), said many of the loans now failing not only featured ballooning mortgage payments that borrowers cannot afford after an introductory period, but had other high-risk characteristics like second liens and a lack of equity that should have been red flags to borrowers, lenders and investors alike.

“It was clear to investors there was huge risk, so I think everybody needs to share the pain now,” she said. “We did not have good market discipline with investors buying all these mortgages.”

Ms. Bair told reporters that many times it is in the interest of investors as well as borrowers to work out new loan arrangements to avoid foreclosure because the cost of seizing and reselling the homes is high. She suggested that some investors may allow borrowers to maintain low “starter” interest rates to prevent defaults when the rates suddenly adjust to higher market rates.

“I don’t think they really will be harmed if the starter rate is just continued.” she said. “What’s the alternative? Foreclosure, and then they face much bigger losses.”

The FDIC and other U.S. bank regulators issued a joint statement yesterday encouraging mortgage lenders to “work constructively with residential borrowers” who may be in danger of missing payments on their loans.

Regulators “encourage financial institutions to consider prudent workout arrangements that increase the potential for financially stressed residential borrowers to keep their homes,” the regulators said, as long as such arrangements are “feasible or appropriate.”

However, Ms. Bair testified that workout arrangements may not be possible in many cases because of legal constraints contained in the loan contracts and because most mortgages in recent years were securitized in loan pools and sold to investors — creating an inflexible legal situation that makes it difficult to rework loans in favor of the borrowers.

The loan-servicing agencies that funnel mortgage payments each month to investors usually have contracts charging them with maintaining the best interests of investors — not the borrowers — which can lead to early foreclosures in some cases, regulators said.

“The entire housing finance system rests on the integrity and dependability of mortgage contracts between borrowers and lenders,” said Richard F. Syron, chairman of Freddie Mac. While foreclosure is an “undesirable outcome for both parties” in most cases, he said, “at the end of the day, the ability to enforce a mortgage contract, including the use of foreclosure, is critical to continued investors confidence in the U.S. housing market.”

George Miller, executive director of the American Securitization Forum, warned lawmakers that “well-intentioned” efforts to help borrowers in distress can have unintended consequences. He said investors are being much more cautious about what securities they buy these days.

Any regulatory overkill that forces investors to suffer undue losses could cause them to “shun the market altogether and cut off mortgage credit for worthy subprime borrowers,” he said.

Harry C. Alford, co-founder of the National Black Chamber of Commerce, also cautioned against bailing out borrowers who took on more than they could handle, contending that will make it harder for more worthy borrowers to get the loans they need.

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