Treasury's Paulson seeks broader mortgage help

By David Lawder

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson is pressing the U.S. mortgage industry to help large groups of borrowers automatically, worried lenders will be unable to staunch a worsening mortgage crisis if they try to fix loans one-by-one.

In an interview with the Wall Street Journal published on Wednesday, Paulson said he was "aggressively encouraging" the mortgage servicers to develop new criteria that would speed the qualification of certain borrowers for better terms more quickly as a crush of subprime mortgages reset next year.

This is a shift from Paulson's previous strategy of encouraging the industry to work on a case-by-case basis with troubled borrowers.

He told the newspaper he is expecting a wave of mortgage defaults next year, adding:

"We're never going to be able to process the number of workouts and modifications that are going to be necessary doing it just sort of one-off. ... I've talked to enough people now to know there's no way that's going to work."

The change comes as a Treasury-organized alliance of mortgage servicers, lenders, investors and counselors called Hope Now this week began sending out 300,000 letters to at-risk borrowers to offer them individual help to avoid default.

Paulson believes the high volume of borrowers seeking to modify their loans could swamp servicers unless they take a more systematic approach to assess borrowers' financial situations, said Treasury spokeswoman Michele Davis.

Mortgage servicers collect monthly payments from borrowers and pass funds to the investors who purchased securitized pools of mortgages.

"His concern is simply that with the volume of loans resetting, a system that looks at every individual case would be overwhelmed," Davis said of Paulson.

"There will always be loans that need to be individually reviewed, but where there can be clear categories of borrowers identified who are automatically eligible for certain modifications, that will speed the process," Davis said.

Paulson said the number of potential U.S. home-loan defaults "will be significantly bigger" in 2008 than in 2007.

"The nature of the problem will be significantly bigger next year because 2006 (mortgages) had lower underwriting standards, no amortization, and no down payments," he said, adding: "We'll watch carefully mortgages that will be reset."

A large number of subprime mortgages, which are made to borrowers with poor credit histories, had low, interest-only "teaser" rates that reset after two years to higher rates as amortization starts, causing a jump in monthly payments.

MORTGAGE LOSSES AT $300 BLN

About $890 billion of subprime U.S. mortgages will have their rates reset in 2008, peaking in March, the Organisation for Economic Co-operation and Development said in a report on Wednesday.