Dec. 3 -- U.S. Treasury Secretary Henry Paulson said the government and banks will ``soon'' announce a plan to keep subprime mortgage borrowers ``with steady incomes and relatively clean payment histories'' from losing their homes.
``The number of subprime mortgage resets is going to increase dramatically next year, and we need to make sure the capacity is there to handle it,'' Paulson said in the text of a speech at a housing conference in Washington. ``We can strike the necessary balance to mitigate the risk to our economy of the housing downturn.''
The Treasury and mortgage industry officials are negotiating an agreement to fix interest rates on some loans to prevent a surge in defaults as borrowing costs rise. Paulson didn't comment in the speech on how long of a freeze he supports.
He did propose a plan that, if enacted by Congress, would let state and local governments ``temporarily broaden their tax- exempt bond programs to include mortgage refinancings.''
Paulson is seeking to mitigate the damage that a housing recession will have on the rest of the U.S. economy and prevent further losses on securities backed by subprime loans.
``Treasury is aggressively pursuing a comprehensive plan to help as many able homeowners as possible keep their homes,'' Paulson said.
Four Categories
In the speech, he identified four categories of subprime borrowers: those who can afford to pay adjustable-rate loans; those who don't have ``the financial wherewithal to sustain home ownership;'' those who choose to refinance their mortgage -- which he called ``the first, best option'' -- and those who can afford the introductory rate but not the adjusted one. It is the last category that the government is committed to helping, he said.
``We are focusing on this group, determining who they are and what steps may appropriately assist them,'' Paulson said. The plan, ``does not, and will not, including spending taxpayer money on funding or subsidies for industry participants or homeowners.''
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, usually 30 years. About 100,000 such loans will reset each month over the next two years, according to research by UBS AG.
U.S. home foreclosures almost doubled in October from a year earlier as subprime borrowers failed to make higher payments on adjustable-rate mortgages, Irvine, California-based RealtyTrac Inc. said on Nov. 29.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., has been working with Paulson and favors extending introductory rates for between five and six years. The Office of Thrift Supervision, which hosts today's conference, advocated a three-year freeze. Paulson didn't discuss timelines in the speech.
Ratings Questioned
Moody's Investors Service is preparing the biggest credit rating cuts since subprime mortgages contaminated the bond market. The ratings agency said on Nov. 30 it may lower ratings on $105 billion of debt sold by structured investment vehicles after the net asset values of 20 SIVs sponsored by firms including Citigroup Inc. declined to 55 percent from 71 percent a month ago. The assets were valued at 102 percent in June.
Paulson also reiterated his call for the Senate to pass legislation to help the Federal Housing Administration guarantee loans for delinquent borrowers. ``The administration is taking action to help homeowners, and Congress must do the same before it leaves for the year,'' he said.
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