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Freezing rates won't be easy

Helping the holders of subprime mortgages presents other risks.

By Times wires
Published December 8, 2007

WASHINGTON - Be ready to wait if you want to get information from a toll-free hotline about freezing the interest rate on your subprime mortgage.

Minutes after President Bush outlined a plan to help strapped homeowners, callers were told to have patience until a counselor could answer their questions and "devote as much time to you as necessary."

But, once they do get through, homeowners may not find the answers they sought.

One caller to the toll-free hotline 1-888-995-HOPE (4673) was told there would be "lots of hoops to jump through" to obtain the five-year freeze. The rate hold goes to the heart of the relief effort for people with subprime mortgages, which are loans offered to borrowers with tarnished credit or low incomes.

The White House on Friday defended the system and its eligibility requirements.

"I wouldn't call them 'hoops,'" White House deputy press secretary Tony Fratto said. "I think we are trying to make sure, as we outlined yesterday, that we're getting at the right population that can best be served by this program."

Bush's three-pronged plan calls for freezing rates or refinancing into either a new private mortgage or a Federal Housing Administration-backed loan. As many as 1.2-million subprime mortgages paying adjustable rates will be eligible for assistance under the plan, or about two-thirds of the 1.8-million subprime owner-occupiers facing a reset.

Bush's plan, however, may prove to be a cure that breeds another disease, some say.

"If the government goes in and changes contracts it will definitely have a chilling effect on the securitization of mortgages," said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co. in Jersey City, N.J., which oversees $120-billion in assets. "When the government comes in and says you have contracted to have this arrangement and you can no longer have it, I think it opens the door for lawsuits."

Though the deal will help borrowers who will fall behind once rates reset to higher levels through July 2010, the plan may force investors in the $6.3-trillion market for home-loan bonds, created by pooling loans and funneling interest payments to bondholders, to revalue their holdings.

"It could end up there's less confidence in the viability in the bond markets and the mortgage markets going forward and it could lead to higher interest rates and higher mortgage rates for everybody," said Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets.

Back in Washington, the Federal Reserve is finalizing a far-reaching mortgage proposal that would ban certain lending practices and apply to the lightly regulated subprime mortgage specialists that proliferated during the recent housing boom.

The proposal, expected in two weeks, is emerging as the most muscular use of regulatory power at the central bank since Fed Chairman Ben Bernanke took office in early 2006.

It is expected to target certain prepayment penalties as well as loans that don't escrow taxes and insurance.

The plan also targets low-documentation loans and loans that are made regardless of a borrower's ability to make payments, Fed officials have said.

[Last modified December 7, 2007, 22:37:28]