Mortgage broker, lender plan too little too late

By Lynn Adler - Analysis

NEW YORK (Reuters) - The latest U.S. federal plan to restore confidence in U.S. mortgage bond and housing markets, promising strict home lender and mortgage broker standards, might thwart the next crisis but does little to quell this one.

U.S. Treasury Secretary Henry Paulson unveiled the President's Working Group plan on Thursday, recommending "strong nationwide licensing standards" for brokers and tougher oversight of all mortgage originators.

Slack lending practices that fostered record U.S. home price appreciation earlier in the decade are faulted for the housing bubble and its subsequent bursting.

Thursday's federal proposal, however, provides no relief to banks and investors currently overloaded with bad mortgages and loans backed by those loans.

With home mortgage foreclosures escalating, there is a dearth of investor demand for bonds backed by many mortgages. In addition, lenders are rejecting many more borrowers and house prices are falling in what is seen as the worst housing market since the Great Depression.

"The horse is out of the barn on this cycle and recession," said Phil Immel, broker at Prudential California Realty in Dana Point, California, and founder of RealEstateGuru.com.

Paulson's proposals "may be good for the next down-cycle in real estate, which happens every seven to 10 years, but it shouldn't have much impact of calming any markets, real estate or Wall Street, for years to come," said Immel.

Even mortgage bonds issued by government-chartered Fannie Mae (FNM.N) and Freddie Mac (FRE.N), considered among the safest mortgage securities, are paying some of the highest yield premiums above U.S. Treasury bonds in more than two decades.

Taken together, each of a growing number of federal and private plans aimed at returning order to chaotic housing markets help, economists and investors said.

But one of the main flaws with the plan floated by Paulson is that it fails to address the burdensome stockpile of soured mortgages that are spurring corporate failures and stifling the willingness of banks to lend.

Greater scrutiny is probably good, but "Paulson's proposal doesn't on its face do anything about existing stock," said Gregory Miller, chief economist at SunTrust Banks Inc in Atlanta.

"The element of this current downturn that's most difficult to overcome is that the current stock of mortgages, those 2005-06 vintage mortgages where most of the problems have shown up ... are still on the balance sheets of financial institutions and in the portfolios of some investors," he said.

However, a Federal Reserve program unveiled on Monday to boost financial system liquidity is a step in the right direction, most analysts agree.

Even if short-lived, the Fed's plan to accept up to $200 billion in collateral from dealers using a broader base of mortgage securities is a way for dealers to push off some poorly performing assets and possibly stimulate lending.

Some analysts say the Paulson proposals may deepen the housing crisis, and may not even help prevent the next one.