Attempt to freeze sub-prime interest rates could lead to investor protest UPDATE

Attempt to freeze sub-prime interest rates could lead to investor protest UPDATE

	Published : Fri, 30 Nov 2007 20:59 By : Agencies Print this Story

(Updates with industry testimony)

WASHINGTON (Thomson Financial) - Two major questions that need to be resolved before a government-led agreement can be worked out to freeze lower interest rates on sub-prime mortgage loans are whether investors in these loans will agree with this change, and if not, whether their opposition would lead to a wave of lawsuits against the move.

Treasury Secretary Henry Paulson, federal regulators and several lenders, including Citigroup, Wells Fargo, Washington Mutual, and Countrywide, met yesterday and are reportedly discussing the option of maintaining low 'teaser' interest rates for sub-prime borrowers. The idea is to make it easier for these borrowers to keep up on the mortgage payments by keeping rates lower for a longer period of time.

One obvious problem with the proposal is that in many cases, the sub-prime loans in question have already been securitized and sold to investors. And many of these investors could oppose efforts to modify these loans, which are their investments.

'The banks don't own the loans anymore,' Harm Bandholz of Unicredit said. 'Even if the lenders agree, there could be lots of lawsuits.'

Bandholz said investors were expecting loan payments to rise, and any change to the structure of these loans could be opposed by investors who are disappointed in smaller payments.

The possibility of some opposition is not a surprise, as evidenced by the involvement of the American Securitization Forum (ASF) in the ongoing industry discussions on how to provide relief to struggling borrowers.

ASF is an affiliate of the Securities Industry and Financial Markets Association (SIFMA), which has already said it opposes legislation that would allow judges to modify loans in bankruptcy proceedings.

ASF said today in a statement that it applauds Paulson for working with industry groups on a solution, and said it supports loan modifications 'in appropriate circumstances,' but did not address the idea of freezing interest rates on sub-prime loans.

ASF testified on this topic generally today at a House Financial Services Committee hearing in California, saying industry discussions are focusing on how to determine which borrowers could be helped by some form of loan modification.

'Currently, we are striving to develop streamlined methods of segmenting borrowers with various characteristics,' ASF Deputy Executive Director Tom Deutsch said. 'We believe that streamlining the process of evaluating borrower characteristics and matching them up efficiently with the appropriate loss mitigation options will ultimately help servicers manage their responsibilities in a changing market, while appropriately balancing the interests of borrowers and investors.'

In testimony for the same hearing, Brad Blackwell, Executive Vice President of Wells Fargo's home mortgage division, acknowledged the problems surrounding the proposal.

'Since the vast majority of the sub-prime loans we service are held by investors, an ongoing industry dialogue organized by the American Securitization Forum has been instrumental in helping us to develop solutions that take into account our secondary market contractual obligations,' he said.

'Over the past few weeks, we have been working closely with Treasury Secretary Henry Paulson, the federal banking regulators, and the ASF on more systematic solutions for segments of sub-prime consumers who share similar credit characteristics.'

Analysts agreed today that ensuring support from investors is a major hurdle to the effort, and said this problem and others means a solution is likely weeks or months away, and is unlikely to be announced in the short term. Paulson himself is expected to speak next week to provide an update on the effort, but sources said they did not expect him to announce a finished plan.

Ongoing discussions on how to help struggling homeowners are taking place under the Hope Now Alliance, a group of mortgage servicers, counsellors, and non-profit groups that were brought together by Paulson.

In the meantime, lenders said they are continuing to modify loans whenever possible.

Blackwell testified in California today that about 3 pct of the 7.9 mln loans backed by Wells Fargo are sub-prime adjustable rate mortgages, and said most of these can be modified.

'At this time, it appears that we can find workable solutions for the vast majority -- 80 to 88 pct -- of these loans,' he said.

Michael Albon, Senior Vice President of Washington Mutual said in testimony for the same hearing that his company has modified 720 mln in loans so far.

pete.kasperowicz@thomson.com

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