5 banks to refinance home loans
$100m-plus plan aims to help contain wave of foreclosures
Five of the largest banks in New England plan to make a $100 million commitment, orchestrated by the Federal Reserve Bank of Boston, to refinance the loans of several hundred subprime borrowers into mortgages with fixed interest rates.
The program, like several initiatives already underway, is intended to contain the foreclosure crisis by focusing on borrowers who can afford their monthly mortgage payments now, but not when scheduled rate increases drive up their monthly payments.
Borrowers who are already facing foreclosure will not qualify for the loan program.
Citizens Financial Group, Sovereign Bancorp Inc., TD Banknorth Inc., and Webster Financial Corp. each will earmark $25 million to refinance subprime borrowers, according to executives familiar with the effort, who requested anonymity because it has not yet been unveiled. Bank of America Corp. said late yesterday that it will also participate, though a spokesman said the amount of its commitment had not been determined.
An announcement, with details on a website for interested borrowers, is scheduled for Thursday at the Boston Fed.
Recent research by the Boston Fed found 26 percent of subprime borrowers in New England could qualify for better loans because they have decent credit scores and homes worth more than their mortgage debts. Some of those borrowers can refinance without any assistance. But many fail to meet other requirements.
It is not clear how many people in that second group will be able to refinance through the new program. There is no indication that the banks plan to relax significantly their normal standards for making loans.
There is evidence the programs may not work if those standards are not relaxed.
A number of states, including Massachusetts, have started refinancing programs with similar guidelines, aimed at similar borrowers. The total commitments exceed $900 million, but only a handful of borrowers have been refinanced.
The basic problem: The borrowers who come seeking help don't qualify for the refinancing, while those who may be eligible haven't come forward.
The new program could fare better by refinancing borrowers into loans guaranteed by the Federal Housing Administration, which allows lenders to relax their standards by promising to repay lenders if borrowers don't.
The US House and Senate have both passed similar bills that aim to expand the FHA's refinancing activities. The two chambers need to reconcile the differences between the bills.
Former Federal Reserve chairman Alan Greenspan suggested Sunday that the federal government should consider giving money to homeowners who can't make mortgage payments.
"It's far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates," Greenspan said on ABC's "This Week."
The suggestion was quickly rejected by the Bush administration, which focused on encouraging action by mortgage companies. For example, this month the administration brokered a deal in which mortgage holders agreed to freeze interest rates on some subprime loans.
"I don't think what we need is a big government bailout right now," Treasury Secretary Henry Paulson said in an interview on Fox Business News. "I think what we need is to help the markets work the way they're intended to work and avoid those foreclosures that are preventable."
Material from the Associated Press was used in this story. Binyamin Appelbaum can be reached at bappelbaum@globe.com.
