Paulson shift pressures home lenders, investors
Treasury chief points to FDIC program as model to recast loans
Treasury Secretary Henry Paulson's decision yesterday to not have the US government purchase troubled mortgage-related securities puts more pressure on housing lenders and investors to work out problem loans on their own.
Paulson's support of a Federal Deposit Insurance Corp. pilot program to systematically help troubled borrowers also focuses more attention on FDIC chairwoman Shelia Bair, who has emerged as a leading figure to help resolve the housing crisis.
The outgoing Treasury secretary indicated that tax dollars should not be used to recast loans of borrowers facing foreclosure because the government would not be able to recoup its money, as is intended under the $700 billion bailout passed last month.
Instead, with the government directly pumping capital into banks and other lenders, Paulson indicated those companies now have a responsibility to prevent foreclosures among their customers.
Following on his point, government financial regulators also yesterday stepped up pressure on lenders and other mortgage holders to adopt systematic, proactive programs to modify problem loans.
"The agencies expect banking organizations to work with existing borrowers to avoid preventable foreclosures, which can be costly to both the organizations and to the communities they serve," the regulators said. "All banking organizations are expected to adhere to the principles in this statement."
For example, the regulators said mortgage holders should lower loan costs to the point where homeowners can afford to pay for the life of the loan, and not just for a short period.
Housing activists criticized the move yesterday as a sellout of the millions of troubled borrowers trying to save their homes.
Sharon Price, director of policy for the National Housing Conference, said the government's instructions to financial institutions were too tepid.
"It should be more than a little memo - it should be a requirement to get the dollars," said Price. "I find it hard to understand why it is OK to help these corporations, but the idea of helping individual families that are in trouble is untenable."
Meanwhile, representatives of the financial companies that hold mortgages told a congressional panel that they can't solve the problem on their own at a time when a slowing economy will likely result in many more homeowners being unable to afford their loans.
"While critically important and increasingly employed, industry-led mitigation initiatives, including loan modifications, are not a panacea for declining home prices, mortgage defaults, and foreclosures," said Tom Deutsch, deputy executive director of the American Securitization Forum, which represents investors and others in the mortgage securities industry. "Federal government initiatives . . . will have to be even more aggressive in their efforts to stabilize homeownership, neighborhoods, and communities around the country."
Paulson did point to a federal government initiative as a potential model for helping homeowners: the FDIC's recasting of mortgages for customers of the failed IndyMac Bank.
So far, the FDIC has rewritten loans for nearly 5,000 delinquent borrowers, reducing their payments by an average of $380 a month.
FDIC officials estimate a similar nationwide program could help about 3 million homeowners at a cost of about $40 billion, with the losses to be shared between lenders and the government.
"I believe it is an important idea," Paulson said, and added this qualification: "As we evaluate the merits of any new proposal, we also will have to identify and justify the means to finance it."
Jenifer McKim can be reached at jmckim@globe.com. 