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Thursday, December 06, 2007 6:44 PM ET
The devil's in the details
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Industry Document: Streamlined Foreclosure and Loss Avoidance Framework for Secu... 12/6/2007

Few specifics of President George Bush's program to freeze rates on adjustable-rate mortgages emerged Dec. 6 during the press conference to discuss the measure. A later conference with U.S. Treasury Secretary Henry Paulson also left much to be desired in terms of details of the plan.

"There's still a lot of uncertainty out there in Washington," Keefe Bruyette and Woods Inc. analyst Brian Gardner told SNL. "There are as many questions being asked today as have been over the last couple of days."

According to Gardner, one key number that Paulson did toss out does not hold water. Paulson said 1.2 million subprime ARM borrowers will be eligible for the program, which will freeze the interest rates on some adjustable-rate mortgages for five years. Gardner told SNL that far fewer mortgages will ultimately be reworked, with the actual number of altered loans amounting to "several hundred thousand."

Paulson insisted that the new program is not a bailout, emphasizing that no government money will be spent assisting struggling homeowners.

"In the normal case, this is the way markets work," Paulson said. "There are workouts and there are modifications when homeowners have trouble making their payments. Foreclosure is the last resort. So all this is is the private sector coming together to deal with some very complex obstacles to do what they can to avoid foreclosures that are in no one's interest."

According to materials provided by the American Securitization Forum, the new policy applies to ARM loans that have an initial fixed-rate period of three years or less and that were originated between Jan. 1, 2005, and July 31, 2007. In addition, in order to qualify, such loans must be included in securitized pools and have an initial interest rate reset between Jan. 1, 2008, and July 31, 2010.

"With the investor community on board and as a clear beneficiary of this approach, the risk of litigation should be manageable," Paulson said. "I expect servicers across the industry to pursue this streamlined approach."

House Financial Services Committee Chairman Barney Frank, D-Mass., said during a Dec. 6 hearing that the plan only applies to borrowers with FICO scores below 660. Stanford Group policy analyst Jaret Seiberg said in a Dec. 6 report that borrowers must be current on their loans and meet a 97% loan-to-value test, since borrowers need to make a 3% down payment on Federal Housing Administration loans. Loans with LTV ratios below 97% would be pushed into refinancing plans.

But the plan includes no penalties for servicers or other parties who fail to adopt Paulson's new loan rate criteria.

"It appears to be based on voluntary participation," Gardner told SNL.

Bush told the press that lenders are "already refinancing and modifying mortgages on a case-by-case basis," and that "with its systematic approach, HOPE NOW will be able to help large groups of homeowners all at once."

Other industry observers, including Friedman Billings Ramsey & Co. Inc. analyst Paul Miller, have also noted that the private market is already working through loans on a voluntary basis, and the going has been generally slow. Sens. Hillary Clinton, D-N.Y., and Christopher Dodd, D-Conn., recently wrote letters to Paulson emphasizing that only 1% of subprime mortgages have been modified by lenders and servicers in 2007.

Bush devoted much of his speech to criticizing Congress for failing to pass legislation concerning the housing crisis. The House, of course, has passed several bills related to housing issues, but the closely divided Senate has seen little progress.

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