BOSTON (Reuters) - A bill that would expand refinancings of risky mortgages by requiring voluntary lender write-downs is the industry’s last chance to improve without more drastic regulation, U.S. House Financial Committee Chairman Barney Frank said on Monday.
“If this program, this set of inducements, for people to avoid foreclosure doesn’t make much difference, what you will face next year ... will be much tougher rules about the home mortgage industry in general,” he said at a Mortgage Bankers Association meeting in Boston.
Frank’s committee approved a sweeping bill last week to enable the government to finance $300 billion in distressed mortgages to help 2 million homeowners avoid foreclosure.
The mortgage industry continues to undergo a wrenching correction that has produced record rates of foreclosure and a downward spiral in home prices. Industry efforts to ease loan terms to borrowers haven’t yet had a noticeable effect on the rate of foreclosures.
Falling home prices will result in more than half of all subprime borrowers owing more than their home is worth by year end, according to investment bank Credit Suisse. Frank’s bill, and a similar plan by U.S. Sen. Chris Dodd, seek to curb foreclosures by giving homeowners a renewed stake in their properties.
The House of Representatives is “very, very” likely to pass a package that includes his bill next Wednesday, Frank said. The package will also include regulatory reform of Fannie Mae FNM.N and Freddie Mac FRE.N and giving state housing agencies the right to issue more tax-exempt revenue bonds to help on a local level.
“I am hoping by early June the president will sign a package,” Frank said.
Frank had previously said he was thinking of sending a housing bill to U.S. President George W. Bush by July 4.
Many Wall Street analysts doubt that the plan will have large-scale success because of its voluntary nature. Servicers would have to forfeit portions of their streams of income, which they would likely recover in event of default since they are typically the first to get paid after foreclosure.
Still, servicers that must advance payments to investors in the event of borrower default are increasingly stressed as they are thinly capitalized, analysts at Citigroup Inc. said in a research note last week. These servicers may be better off participating in such a program, they said.
“I think lenders are going to (participate) but with what’s consistent with their fiduciary obligations,” Steve O’Connor, the MBA’s senior vice president of government affairs, told reporters after Frank’s address.
Mortgage servicing companies charged with enacting Frank’s refinancing program may find they don’t have the ability to cooperate, even if they want to accept a write-down, said Nicholas Bratsafolis, chief executive of Refinance.com. They would essentially have to underwrite a new loan, something outside their expertise, he said.
Additional reporting by Scott Malone in Boston; Editing by Tom Hals