The mortgage industry gladly helps people buy homes when the market is up. How much will it help borrowers keep their homes in down times? Last week, the Bush administration got an answer: When all parties win in loan readjustments.
Since August, the Treasury Department has corralled top players in the business to set a new industry standard for rescuing homeowners who will face higher interest rates in the next couple years under what are called subprime loans, or 6.5 percent of all mortgages.
A collective response by lenders will be one small step for easing a housing depression and a giant leap for many borrowers.
By winning such a pact to aid troubled homeowners who meet certain credit thresholds, the government must now watch closely to see how this finely threaded deal plays out – and how fast.
For now, the incentives for the industry to act under these new loan-rescue standards remain strong:
1. Lenders suffer less if more borrowers keep up payments and the market doesn't further worsen under the weight of many more foreclosures – which are now at a record rate, or 0.78 percent of all mortgages.
2. Companies that service these risky loans are much less likely to be sued by investors who hold this debt as "bundled mortgages" in securities. Most mortgage contracts allow refinancing along "standard industry practice" if the purpose is to save a portion of the investment.
3. Doing something now fends off tougher steps from Congress during the 2008 election season.
Many of the proposed steps by Capitol Hill and some presidential candidates could hurt the home industry even more than the current bubble-bursting market correction. They would inject more government control in private contracts and create more market uncertainty. That would scare off investors in mortgage securities – investors that range from teacher pension funds to China, and whose money has made home-buying in the US more affordable.
The agreement is tailored to help only those borrowers who have kept up payments but may face difficulty as a loan's higher rates kick in by the end of 2009. Borrowers who have been delinquent – about 22 percent of subprimes – wouldn't qualify, nor would those borrowers not facing financial difficulties. And this deal will last only five years, or long enough for the housing market to recover.
Of the 1.8 million subprime borrowers who got their loan between Jan. 1, 2005 and July 31, 2007, an estimated 240,000 to 500,000 of them would receive either a freeze on their current "teaser" interest rate or a refinanced loan. Will those numbers be enough to add some stability to the housing market?
So far the industry and stock market seem to indicate so. The credit markets are still adjusting to the financial fallout of the housing downturn, punishing anyone who took on too much risk. But the pace of refinancing home loans case by case remains slow. This agreement should speed it up.
Treasury's light hand on the industry, combined with lower interest rates from the central bank, may help prevent a housing recession from further damaging the economy. Lenders, too, need to recognize they have a role in rescuing the market they helped create.