By Alison Vekshin
Feb. 12 (Bloomberg) -- Treasury Secretary Henry Paulson and banks representing half the U.S. mortgage market agreed to offer 30-day freezes on foreclosures, acknowledging the need for a stronger response to the worst housing slump in a generation.
``The worst isn't over, the worst is just beginning'' for some borrowers, Paulson said today at a news conference in Washington with Housing and Urban Development Secretary Alphonso Jackson. The housing correction ``is not over; it's going to take longer,'' he said.
JPMorgan Chase & Co., Citigroup Inc. and four other banks set up a plan to encourage homeowners at risk of default to contact lenders about modifying their loans. Paulson said that he's open to additional measures, while rejecting a Democratic proposal for the government to buy distressed mortgages.
``It's like a building collapse,'' Edward Kane, a finance professor at Boston College, said today in a telephone interview. ``Now servicers have to do triage. The lending industry has to set up its own programs for repairing these loans.''
The banks, which include Bank of America Corp., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp., said the program would start with a letter to homeowners more than 90 days delinquent that lays out procedures to qualify for a ``pause'' in the foreclosure process. The homeowner has 10 days to respond so the lender is able to weigh payment options.
Analysts and officials have said a difficulty in encouraging borrowers to get in touch with their lenders has hampered efforts to stem foreclosures. About 16 percent of 775,000 homeowners at risk who were sent letters by mortgage servicers responded over a three-month period, Paulson said.
Subprime, Alt-A and prime borrowers are eligible, according to the plan. Subprime mortgages are made to borrowers with poor credit or high debt. Alt-A loans are for borrowers who want atypical terms, such as proof-of-income waivers or investment- property collateral, without sufficient compensating attributes, such as larger down payments. Securitized loans, those packaged and sold to investors, would also qualify.
All six banks are members of Hope Now, the group of lenders, trade groups and counselors formed last year to head off a surge of foreclosures by identifying and working with borrowers struggling to meet higher payments.
``The Hope Now alliance is an evolving effort,'' Paulson said today. ``As our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures.''
The Treasury chief called on all mortgage lenders to adopt today's initiative, known as Project Lifeline.
Senate Banking Committee Chairman Christopher Dodd said today the plan isn't enough to curb the surge in foreclosures expected in the next few months.
``It's clear we need to move faster and more aggressively to combat this problem and keep Americans in their homes,'' Dodd, a Connecticut Democrat, said in a statement.
Dodd is exploring the creation of a federal program to buy and restructure delinquent and near-delinquent loans ``to help many borrowers as quickly as possible.''
Asked about Dodd's proposal today, Paulson said ``no I don't see that.''
``That is modeled on a program that was put in place during the Depression,'' Paulson said. ``We have many institutions that are now in place that weren't there'' to help in the 1930s, while the unemployment rate is now 4.9 percent, compared with 25 percent back then, Paulson said.
Paulson, who as recently as last month opposed a moratorium on foreclosures, wants lenders to go beyond earlier pledges to freeze subprime interest rates for five years. The deepest housing slump in a generation is threatening consumer spending and the job market, pushing the economy to the verge of a recession.
Jackson said the plan is a ``responsible, timely effort'' aimed at encouraging borrowers to come forward if they're having trouble making payments.
``In some parts of our nation, the foreclosure crisis is have a devastating impact on neighborhoods and communities,'' said Floyd Robinson, president of Bank of America's consumer real estate and insurance services group. He stressed that ``homeowners can only take advantage of this program by taking action -- they must respond when they hear from us.''
Paulson last week heard complaints from Democrats in Congress that the number of homeowners receiving relief so far has been insufficient. ``We are now in the midst of one of the most serious economic crises we have seen in recent years,'' Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, said in Boston yesterday.
Federal Reserve officials project about 2 million homeowners face higher mortgage rates over the next two years as their loans reset higher.
``It is really unfortunate that we keep having these very modest steps in the right direction,'' Jim Carr, chief operating officer at the National Community Reinvestment Coalition said of the initiative today in a telephone interview.
Carr said the problem is that servicers aren't ``putting borrowers into a long-term sustainable mortgage,'' relying instead on temporary solutions such as loan modifications and repayment plans.
Declining house prices have made it harder for some borrowers to refinance as the value of their homes drops, sometimes to less than what they owe. Sales of existing homes fell the most in 25 years last year and values dropped for the first time since the Great Depression.
The accord among the six banks is the latest effort backed by the Bush administration to rescue troubled borrowers, and followed a week of talks between lenders and officials. In December, Paulson negotiated a deal that would freeze rates on some subprime loans for five years.