WASHINGTON — Revealing more details about a national mortgage-rescue plan that's still in the works, Treasury Secretary Henry Paulson proposed Monday to help state and local governments issue tax-exempt bonds to pay for mortgage refinancing and confirmed that he seeks to temporarily freeze the rates of tens of thousands of home loans that are about to adjust to higher rates.
Paulson told a national housing forum that Congress should authorize state and local governments to broaden their tax-exempt bond programs temporarily. Currently, states have authorization to issue tax-exempt bonds only to aid first-time homebuyers in designated distress zones. Paulson proposed to expand this to allow state and local governments to issue tax-free bonds to help in mortgage refinancing.
He also confirmed that he's trying to craft a plan that would prevent massive foreclosures when roughly 1.5 million adjustable-rate mortgages, or ARMs, reset to higher monthly rates next year. The affected ARMs involve subprime loans — those given to borrowers with weak credit histories.
The Treasury Department hopes to target holders of subprime ARMs who aren't yet behind on their payments but could be next year after their loans reset to higher interest rates.
"As volume increases, we will need an aggressive systematic approach to fast-track able borrowers into a refinance or mortgage modification," Paulson said. He stressed that there would be no government subsidy to borrowers or lenders.
The approach assumes that lenders will go along with making less money than they would have once the adjustable-rate mortgages reset — if borrowers were able to pay the higher rates.
The same holds true for investors who purchased the loans on the secondary mortgage market, where they were bundled together with other loans and sold as mortgage bonds.
The incentive for lenders and investors is to keep troubled loans from falling into foreclosure and to come up with an industry-wide plan that will keep losses at a minimum and allow the slumping housing sector to recover.
Paulson's plan seeks to rescue from ARM resets the borrowers "with steady incomes and relatively clean payment histories who could afford the lower introductory rate but cannot afford the higher adjusted rate," he said.
Just who these borrowers are and how they would be identified is still under discussion. It's a thorny issue because as lending standards deteriorated in late 2005 and 2006 at the tail end of a nationwide housing boom, many borrowers took out "no doc" loans — no documentation — for which they didn't reveal their income or inflated their stated income.
Mortgage servicers, who collect the monthly mortgage payments from consumers on behalf of companies that bundled mortgages into bonds, said privately that Paulson's plan could help. Speaking on condition of anonymity because of the negotiations, these companies said that consumers have been reluctant to accept ARM reset freezes that lenders offered, but that a government-led solution might work.
Speaking at the same forum, sponsored by the Office of Thrift Supervision, the heads of Countrywide Financial and Washington Mutual Inc., which have among the largest exposures to problem mortgages, publicly supported Paulson's plan.
Countrywide CEO Angelo Mozilo and Washington Mutual CEO Kerry Killinger also called on Congress to increase Federal Housing Administration loan limits and to broaden the types of loans that Freddie Mac and Fannie Mae are allowed to purchase. Doing so, they said, would boost confidence and provide more capital.
"Buccaneer capitalism 21st-century style: 'Dear Government, please come help us,'" responded Joseph Smith, North Carolina's banking commissioner and a co-panelist with Killinger.
Senate Banking Committee Chairman Christopher Dodd, D-Ct., said that Paulson's recommendations "strain credulity. The administration has repeatedly failed to use the tools at its disposal to protect homebuyers from abusive lending. The administration has been late to recognize the severity of the problem and slow to act."
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