Subprime savior plan thorny for investors
NEW YORK (Reuters) - A sweeping plan supported by the Bush administration to curb housing foreclosures has drawn only cautious support from the investors whose cash financed the housing boom.
The proposal, expected to be worked out between major mortgage lenders and the Treasury and finalized in the coming days, comes amid increasing political pressure to stop foreclosures from exacerbating the two-year housing slump and tipping the economy into recession.
By freezing adjustable interest rates before they become fixed at a higher level, the plan may curb defaults that have shredded the confidence of credit markets worldwide.
But it could reach too far and halt payments on high interest rate loans and undermine investors who took risks for their subprime lending and expected to get paid for it. It is also too early for many investors to judge the plan without knowing the details.
"You might end up benefiting borrowers who are perfectly capable of making payments," said Ajay Rajadhyaksha, head of fixed-income strategy at Barclays Capital in New York. "I'd be surprised if every investor out there agreed to give servicers carte blanche" to freeze interest rates, he said.
What's more, most subprime borrowers in arrears are defaulting due to fraud or poor underwriting, and not because of higher payments due to scheduled rate increases, he said. Freezing rates may only buy time for the borrower instead of preventing foreclosure.
Such arguments may fall on deaf ears, however, since the housing market has become a top priority for lawmakers frustrated that state and federal efforts to help borrowers have had little effect so far.
Sen. Charles Schumer, a New York Democrat and head of the housing panel of the Senate Banking Committee, on Friday praised the Bush administration for stepping up efforts to help homeowners. He turned the spotlight instead on investors, asking hypothetically if they could be compelled to comply.
Investors who took the greatest risks may also end up perversely benefiting over more prudent bond buyers who accepted lower yields for safer investments, analysts said. The plan would be seen as a bailout for those investors who should take the consequences, they said.
A key lobbying group for participants in the $7.2 trillion mortgage bond market on Friday said it supported the Treasury's efforts in accelerating the problem-solving efforts of the industry in "appropriate circumstances."
"We support loan modifications in appropriate circumstances and continue to work with policymakers to identify loss mitigation obstacles," the American Securitization Forum said in an e-mailed statement. The ASF declined further comment, a spokeswoman said by e-mail.
Talk of the far-reaching plan to buoy mortgage credit gave a modest boost to the global credit markets, many of which have been frozen since the summer as investors rattled by subprime losses pulled back from all risk.
Dealers flooded the mortgage market with lists of subprime bonds that had been impossible to sell, hoping to shed the bonds whose cratering market valuations have caused heavy losses.
"It's a good thing generally the fiscal and monetary policy makers are recognizing their responsibility and acting accordingly," one money manager said. "The problem is that the devil is in the details, and without any specifics it is almost irresponsible of market participant to trade on the news."
In the end, investors face a compromise to what may develop into a losing proposition for all. The Treasury and lenders such as Wells Fargo & Co (WFC.N) involved in the HOPE NOW alliance have been engaged with both consumer groups and the ASF since early October trying to find common ground.
Most subprime loans have been packaged into bonds, complicating the process for lenders' modification efforts.
"Since the vast majority of subprime loans Wells Fargo Home Mortgage services are held by investors, the solutions we develop must take into account our secondary market contractual and credit obligations," Michael Heid, co-president of Wells Fargo Home Mortgage, said in a statement.
"A good balance must be struck between upholding these obligations and meeting the needs of consumers," he added.
(Reporting by Al Yoon; editing by Leslie Adler)
