DEC 17, 2012 10:15am ET

Treasury Plan Would Fund Rate Cuts on Mortgages in Private Bonds

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Some struggling homeowners left out of current U.S. government mortgage-aid programs because their home loans have been packaged into private securities could see their interest rates cut through a subsidy being considered by the Treasury Department.

Under the plan, the government would pay the difference between the new and original interest rates to the owners of the loans for five years in an effort to overcome investors’ objections to mortgage modifications, according to a person familiar with plan who asked not to be identified because the initiative is not final or public. Details on the cost of the program and how it would be paid for were not available.

The proposal is among efforts by the Obama administration to aid homeowners who remain under stress even as the housing market begins to recover. Borrowers who owe more than their homes are worth and who have mortgages that have been packaged into bonds issued by private securitizers have been unable to take advantage of existing government aid programs.

“It’s certainly beneficial to think about ways to help underwater borrowers,” said Tom Deutsch, executive director of the American Securitization Forum. “I’m just not sure anybody’s found the right solution yet.”

Deutsch, whose New York-based trade group represents bond investors, issuers and trustees, said his organization had discussed the proposal with Treasury officials and had raised concerns that it might not reduce default rates.

Borrowers who are current on their mortgage payments and who owe at least 25% more than the value of their properties would be eligible for the program, which would reset their loans to the average fixed rate as determined by a weekly survey by Freddie Mac.

About 930,000 homeowners with loans in so-called private-label securities are both underwater and current on their payments, according to data from JPMorgan Securities LLC.

The person familiar with the plan said the Obama administration would move forward with it only if officials become convinced that Congress won’t act first to expand aid for troubled borrowers. The rate-modification proposal is one of a number of concepts the administration is considering if legislative solutions aren’t available, said the person, who asked not to be named because the plans are not final and have not been made public.

Investors may still resist modifications, even if Treasury offers to pay, analysts at JPMorgan Securities said in a weekly note to clients. “We have seen resistance from investors to accept modifications on loans that are not seriously delinquent, and it’s not clear whether prospectuses would allow servicers to do this,” John Sim, Abhishek Mistry and Nabeem Hashem wrote in the note.

Meanwhile, efforts are continuing in Congress to expand borrower aid.

Sen. Dianne Feinstein, a California Democrat, has introduced a bill that would allow borrowers with loans in private-label securities to refinance into mortgages backed by the Federal Housing Administration. Democrat Jeff Merkley of Oregon wrote a measure requiring Fannie Mae and Freddie Mac to pay closing costs when borrowers refinance into a loan with a term of 20 years or less, allowing homeowners to rebuild equity more quickly.

Democrats Barbara Boxer of California and Robert Menendez of New Jersey are co-sponsoring a bill that would expand the government’s Home Affordable Refinancing Program for borrowers whose loans are backed by Fannie Mae and Freddie Mac. The government-sponsored enterprises have refinanced 1.7 million loans through HARP since it began in 2009.

Any action on that legislation before the end of the year would require sponsors to get the language rolled into larger bills that may be enacted to resolve the nation’s broader fiscal policy dispute, Menendez said in an interview this month. Lawmakers could reintroduce the bills next year.

The Boxer-Menendez bill is S. 3522. The Merkley bill is S. 2909. The Feinstein bill is S. 3047.

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