Nov. 30 -- U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers, according to people familiar with a meeting he led yesterday.
Paulson, who will address a housing conference on Dec. 3, presided over a one-hour gathering at the Treasury Department in Washington with federal regulators, bankers and lobbyists. Citigroup Inc., Wells Fargo & Co. and Washington Mutual Inc. executives attended, said a person present, who spoke on condition of anonymity.
The Bush administration cut its forecast for economic growth yesterday, reflecting a deepening housing recession that's roiled financial markets since August. The Commerce Department reported the same day that the median price of a new house fell 13 percent in October from a year earlier, while fewer homes were sold than economists anticipated.
``One of the roles of Treasury is to say `come on, let's get together and see what we can do,''' said Wayne Abernathy, executive director of financial-institutions policy at the American Bankers Association in Washington and a former Treasury assistant secretary. ``You're likely to come up with something that will work both in the marketplace and honor the sanctity of the contracts involved.''
Stocks Advance
Stocks climbed today on speculation Paulson's efforts may help slow credit losses. They also gained after Federal Reserve Chairman Ben S. Bernanke said ``renewed turbulence'' in financial markets may hurt growth, reinforcing investors' expectations for an interest-rate cut next month. The Standard & Poor's 500 stock index rose 0.8 percent to 1,481.14 at the close in New York.
Paulson was joined yesterday by Federal Deposit Insurance Corp. Chairman Sheila Bair, Comptroller of the Currency John Dugan and Office of Thrift Supervision Director John Reich.
Bair has proposed letting borrowers with adjustable-rate subprime mortgages, who are living in their homes and unable to afford resets, get extensions on the starter rate for at least five years. They could also be offered 30-year fixed-rate loans. Reich prefers a three-year freeze.
Also represented at the meeting was the American Securitization Forum, which lobbies for investors, traders, underwriters, accounting firms, ratings companies and other institutions involved in the creation and sale of mortgage- backed securities.
Persuade Investors
U.S. Senator Charles Schumer said the challenge will be to persuade those who buy the securities to back Paulson's effort.
``This is the first time that the Bush administration is working toward a solution that meets the magnitude of the problem,'' Schumer, a New York Democrat, said in a statement.
``But there is a $64,000 question: Will investors go along with this plan?'' he said. ``And if not, can they be compelled to?''
Senate Banking Committee Chairman Christopher Dodd sent a letter to Paulson today urging a ``systematic and proactive'' approach.
``The objective of modifications should be to make homeownership sustainable, rather than deferring foreclosure to a later date,'' wrote Dodd, a Connecticut Democrat who is seeking his party's presidential nomination.
Subprime loans, given to people with poor or incomplete credit histories, typically offer a low introductory rate for the first two or three years. The rate then resets for the duration of the mortgage. About 100,000 subprime loans will reset to higher rates each month over the next two years, according to UBS AG.
`Transparent Process'
``There needs to be agreement and commitment to modify the loans, and there needs to be a transparent process whereby we can monitor the agreement,'' Bair said in an interview in Washington this month.
Jennifer Zuccarelli, a Treasury spokeswoman in Washington, declined to discuss the meeting in detail. ``We are encouraged progress is being made,'' she said.
Paulson said in an interview with Business Week three days ago that ``well before the end of the year, we will have a template and the infrastructure in place to make it easier to handle the wave'' of mortgage resets. Treasury spokeswoman Brookly McLaughlin confirmed the comments today.
Paulson and Alphonso Jackson, secretary of the Department of Housing and Urban Development, are working with ``mortgage lenders and holders and service providers to provide help to Americans so they can stay in their homes,'' White House spokesman Scott Stanzel said today. ``It would be premature to talk about any other announcements.''
Delinquency Rate
Delinquencies on subprime mortgages, which account for less than 15 percent of the $11.5 trillion U.S. home mortgage market, climbed after what Fed officials labeled ``lax'' lending standards spread the past two years. Homeowners were behind on 17 percent of adjustable-rate subprime loans in June, compared with 4.2 percent for prime mortgages of the same type, Mortgage Bankers Association data show.
Financial firms are marking down about $66 billion related to the mortgage market, and Morgan Stanley this week ousted Co- President Zoe Cruz after the firm disclosed $3.7 billion of losses on mortgage-related securities.
The rout will get worse because defaults on home loans are likely to rise, analysts said. The FDIC estimates that 1.54 million nonprime mortgages valued at $331 billion will reset by the end of next year.
`Down Another Level'
Rising defaults ``will take the housing market down another level,'' said Mark Zandi, chief economist at Moody's Economy.com, who will attend the conference featuring Paulson next week. ``In the context of an economy that is not in recession, but pretty close, we will be in a recession right in the teeth of a presidential election.''
An index of credit-default swaps tied to subprime-mortgage bonds rose today in a sign the perceived risk of owning the securities improved. The gauge, compiled by Markit, climbed about 1 point to 78, GFI Group Inc. prices showed.
President George W. Bush's economic advisers yesterday cut their forecast for 2008 economic growth to 2.7 percent from a 3.1 percent rate projected in June. The unemployment rate will rise to 4.9 percent, compared with 4.7 percent previously estimated, according to the Council of Economic Advisers' semi- annual forecast.
SIV Agreement
Paulson may be trying the same approach he took with Citigroup, JPMorgan Chase & Co. and Bank of America Corp. in September to address structured investment vehicles, units set up by banks to finance purchases of assets such as corporate bonds and mortgage securities, Abernathy said. Treasury encouraged the banks to set up a fund that will buy assets from the SIVs, without committing any government money.
Abernathy, who was responsible for financial institutions at Treasury in Bush's first term, didn't attend the gathering yesterday.
Regulators still lack reliable estimates on the extent of the subprime mortgage crisis. Three months after they asked banks to modify loans for borrowers at risk of default, agencies have little comprehensive data on what lenders and loan servicers have done, officials say.
Treasury has urged the Mortgage Bankers Association to gather precise data on loan modifications.
``There is obviously a need to have more comprehensive data out there on what servicers are doing for borrowers,'' said John Mechem, a Bankers Association spokesman in Washington.
Moral Hazard
Mortgage-industry lobbyists have argued that an across-the- board solution is difficult to apply. Rewriting contracts also risks moral hazard -- encouraging borrowers to take on more debt in the expectation of being bailed out if needed later.
``It is really an indiscriminate procedure that would violate the terms of the contract that provide for loan-by-loan decision making,'' George Miller, executive director of the American Securitization Forum, said in an interview this month. A broad approach would ``significantly disrupt the reasonable expectation of investors'' in the $7.1 trillion market for bonds backed by mortgages.
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