Wanted: Default Relief

Rising subprime foreclosures are forcing lawmakers and regulators to look for ways to help delinquent subprime borrowers avoid foreclosure and they are turning to industry experts and lenders for answers.

The Federal Deposit Insurance Corp. is hosting an interagency forum on April 16 to meet privately with servicers, lenders, lawyers and investment bankers to solicit their advice.

"The FDIC is committed to finding solutions for borrowers already trapped in mortgages they cannot afford," FDIC chairman Sheila Bair said in telling a congressional panel about the forum.

She said the forum is designed to develop alternatives to foreclosures and strategies to implement those alternatives. "We look forward to comprehensive discussions and creative approaches at this meeting."

Meanwhile, Senate Banking Committee chairman Chris Dodd, D-Conn., is planning to hold a summit to address what he calls the "subprime crisis" and he is expected to put pressure on securitizers to do more to prevent foreclosures.

The presidential candidate blames predatory and irresponsible lending practices for rising defaults and he wants to provide relief for homeowners facing foreclosure. Senate Democrats have been considering a rescue fund to provide temporary assistance. But now it looks like the committee chairman is looking for a private sector solution.

"The solution to this problem may not be legislative. Instead, I intend to ask leaders from all the stakeholders - regulators, investors, lenders, GSEs, FHA and consumer advocates - to come together and try to work out an efficient process of providing relief to homeowners," Sen. Dodd said. He is expected to announce the date and location of the summit soon.

Most of the troubled subprime loans, such as adjustable-rate 2/28 mortgages, are securitized and the trusts and servicing contracts make it very difficult to do loan modifications.

One industry official said the forums might lead to contract changes in new issuances of subprime mortgage-backed securities to provide more flexibility. But the official contends there is not much that can be done with defaulted loans in existing securitizations.

However, Washington policymakers are not going to stop jawboning with foreclosures rising and the perception that consumers were placed into unsuitable mortgages that they didn't understand and can't afford.

"What we now are faced with are large numbers of good borrowers in good homes with bad mortgages," FDIC general counsel Sara Kelsey told a Women in Housing and Financing meeting recently.

In taking an enforcement action against Fremont General Corp., she noted that the FDIC directed the California subprime lender to develop a plan to work with its delinquent borrowers.

"The goal is to restructure the loans so that the borrowers would be able to repay them," the general counsel said.

Research by the Center for Responsible Lending shows lenders originated 3.2 million subprime mortgages in 2006 and over the life of those loans, 624,000, or 19.4%, will end up in foreclosure.

Sen. Dodd quotes the consumer group's findings often, although industry groups contend they are misleading and inflated. Mortgage Bankers Association data show the percentage of subprime foreclosures started in 2006 was 7.28%. But the MBA is providing the foreclosure rate in a single year. CRL is projecting foreclosures over the life of loans originated in 2006.

A Countrywide Financial Corp. executive recently told the Senate Banking Committee that the cumulative foreclosure rate on its 2006 subprime originations might hit 10%.

Over the past 10 years, Countrywide has originated over 540,000 subprime hybrids and only 20,000, or 3.4%, have ended up in foreclosure, according to executive managing director Sandy Samuels.

"The worst single origination year was 2000, for which the cumulative foreclosure rate was 9.9%. We believe that declining home prices and other factors ... may produce foreclosure numbers on 2006 originations approaching or exceeding those loans originated in 2000," the CFC executive testified.

Mr. Samuels stressed subprime loans constitute only 7% of Countrywide's loan volume and his company has aggressive loss mitigation and outreach programs to help delinquent borrowers.

HSBC Finance Corp. CEO Brendan McDonagh testified that his company set up a new program last fall to identify "at risk" ARM customers who would benefit from a rate modification plan.

"In our program to date, we have assisted more than 2,200 customers and we estimate our assistance will reach more than 5,500 customers in 2007," Mr. McDonagh said. He suggested other lenders might consider similar foreclosure prevention programs.

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