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.
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.
The OECD report said a hypothetical 14 percent loss-rate on subprime mortgages being reset in 2008 could deliver an overall $125 billion hit to lenders. Including the Alt-A or “near prime” category of mortgages, cumulative losses in the $200 billion to $300 billion range “seem feasible,” it said.
Paulson stopped short in the Wall Street Journal interview of endorsing a proposal by Federal Deposit Insurance Corp. Chairman Sheila Bair to freeze interest rates on 2 million loans resetting between now and the end of 2008, saying it was “one idea.”
In California, four top mortgage lenders this week have agreed to a deal brokered by Gov. Arnold Schwarzenegger to allow borrowers facing unaffordable resets to keep their lower initial rates for five more years if they live in their homes and continue to make payments on time.
Schwarzenegger estimated on Tuesday that some 500,000 Californians hold subprime mortgages whose rates will reset at higher levels over the next two years.
Additional reporting by Mike Dolan in London and Masayuki Kitano in Tokyo; Editing by Neil Stempleman