The U.S. Treasury Department and mortgage industry leaders are putting the final touches on a plan that could save struggling homeowners from foreclosure by freezing interest rates before they reset sharply higher.
With more than 2 million subprime borrowers facing higher mortgage costs and possible foreclosure, Treasury Secretary Henry Paulson is expected to announce details of the plan as soon as Wednesday, sources familiar with the matter told Reuters.
Mounting mortgage foreclosures have spooked financial markets around the globe in recent months. Many sinking loans had been repackaged as securities and sold to investors, who are scrambling to get a handle on the value of their assets.
News of the initiative helped lift U.S. stock prices, which had been battered in recent weeks by growing global credit strains and billions of dollars of write-downs on bad mortgage bets by major financial institutions.
"If credit concerns can ease, them maybe we're out of the woods and a lot of the write-downs are probably over," said David Goerz, chief investment officer at High Mark Capital Management in San Francisco.
Shares of lenders and other mortgage-related companies surged on Friday, as did shares of home builders.
Payment Spike Shield
Regulators and the mortgage industry are focused on restructuring 30-year subprime loans that carry fixed interest rates for up to three years but then reset at higher rates, hitting borrowers with sharply higher costs.
During a five-year housing boom that ended in 2005, these adjustable-rate loans were widely available to subprime borrowers, whose spotty credit histories left them with limited loan options. While the loans offer initial low, "teaser" interest rates, they reset at rates much higher than those offered to prime borrowers with strong credit records.
As envisioned, Treasury's plan would effectively extend the fixed-rate period for stressed borrowers, shielding them from a payment spike that could push them into foreclosure.
The White House Friday said it was appropriate to build a "bulwark" against the housing sector's woes, but said it was too soon to discuss details of any plan.
Democratic lawmakers, who have accused the administration and regulators of moving too slowly, welcomed the effort.
"It is imperative that the administration ensure that there is no further delay in reaching homeowners in need of loan modification," said Senate Banking Committee Chairman Christopher Dodd of Connecticut.
Federal Reserve Governor Randall Kroszner said modifying loan terms for large groups of borrowers could help alleviate credit market strains. In a speech in Philadelphia on Friday, he warned that about 450,000 subprime borrowers were set to see their mortgage payments increase in each quarter of next year.
The number of U.S. home foreclosure filings in October jumped by 94 percent to 224,451 from a year earlier, RealtyTrac, an online market of foreclosure of properties, reported on Thursday.
Studies have found that minorities are more likely than whites to get subprime mortgages, though there is no agreement whether that reflects racial steering or economics.
Working Out the Plan
Industry representatives and regulators are still thrashing out details of who would qualify for the interest rate amnesty and how long to extend the fixed-rate period of the loans.
Lenders want to limit mortgage relief to borrowers who have a proven record of making payments under the initial rates.
The plan will likely be discussed Monday at a housing conference organized by the Office of Thrift Supervision. Executives from two major lenders -- Countrywide Financial and Washington Mutual -- are expected to take part.
Paulson discussed the plan at a meeting Thursday with top banking regulators and industry representatives. OTS Director John Reich "was encouraged with the progress made toward a balanced approach that will help people stay in their homes without negatively affecting the markets," a spokesman for the agency said.
In an interview with BusinessWeek magazine, Paulson said he hoped to have a final industry consensus on a loan modification plan before the end of the year.
"We'll have broad agreement on criteria that will make it easier to modify mortgages in the volumes we need," Paulson was quoted as saying in the magazine's Dec. 10 issue.