Paulson Says Subprime Loan Plan to Ease Economy Risks (Update5)

By John Brinsley and Alison Vekshin


Dec. 3 (Bloomberg) -- Treasury Secretary Henry Paulson, seeking to limit damage from a subprime-mortgage crisis that threatens to end the U.S. economic expansion, said he's confident the government and banks will agree on a plan this week.

Paulson is negotiating a deal among banks, mortgage servicers and securities-industry lobbyists to fix some subprime mortgage rates before they reset higher and trigger a wave of defaults. The Treasury chief today proposed letting state and local governments ``temporarily'' exempt taxes on bonds issued to help refinance subprime borrowers.

``The number of subprime mortgage resets is going to increase dramatically next year, and we need to make sure the capacity is there to handle it,'' Paulson said in a speech at a housing conference in Washington. While no ``silver bullet,'' a deal to rewrite a set of subprime loans would ``clearly'' ease the risks from the housing slump, he said in an interview later.

Borrowers ``with steady incomes and relatively clean payment histories'' will be the focus of the mortgage restructuring deal, Paulson said in his speech at the Office of Thrift Supervision conference. ``Treasury is aggressively pursuing a comprehensive plan to help as many able homeowners as possible keep their homes.''

In the interview, he said he wouldn't ``put a number'' on how many people would be affected.

Dec. 6 Announcement

Housing and Urban Development Secretary Alphonso Jackson said in a separate interview that the Bush administration expects to make an announcement Dec. 6. Paulson said ``I am optimistic that we are going to have something to announce by the end of the week.''

Paulson didn't comment on how long a freeze on mortgage rates he's seeking. OTS Director John Reich today said he supports a three-year to five-year fixing of rates for mortgage borrowers at risk of foreclosure. Sheila Bair, chairman of the Federal Deposit Insurance Corp., favors extending introductory rates for at least five years.

Bair, who attended the conference, told reporters ``it's a complicated process and took some time, but I think we're very close now,'' she said.

Lawmakers will examine the issue when House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, holds a hearing on Dec. 6. Bair, Reich and Comptroller of the Currency John Dugan plan to attend.

Democratic presidential candidate Hillary Clinton called for a 90-day moratorium on foreclosures for homeowners who default on subprime mortgages.

Clinton Letter

In a letter to Paulson released by her campaign today, the New York senator advocated a five-year freeze on rates, and said ``the administration and the mortgage industry must reach an agreement that matches the scale of the problem.''

Robert Toll, chairman of Toll Brothers Inc., the largest U.S. luxury homebuilder, said that while the plan will help, defining the group most in need of help was ``key.''

``The definition of who deserves to be helped, who in helping we will help the housing market and the country, is a difficult question and the definition is going to be a rough one,'' Toll said in an interview.

Paulson identified four categories of subprime borrowers: those who can afford to pay adjustable-rate loans; those who don't have ``the financial wherewithal to sustain home ownership;'' those who choose to refinance their mortgages -- which he called ``the first, best option'' -- and those who can afford the introductory rate but not the adjusted one. The government is focused on helping the last category, he said.

No `Taxpayer Money'

``We are focusing on this group, determining who they are and what steps may appropriately assist them,'' he said. The plan ``does not, and will not, including spending taxpayer money on funding or subsidies for industry participants or homeowners.''

The Treasury chief reiterated his view that while the housing recession and reduced access to credit will impose a ``penalty'' on U.S. growth, the economy ``remains fundamentally sound.'' He cited stable inflation, continued job gains, ``healthy'' company balance sheets and rising exports.

Paulson also repeated his support for a ``strong dollar'' and said that while the U.S. economy, like any other, goes through ``ups and downs,'' its ``fundamental strengths'' will be reflected in foreign exchange markets.

Subprime loans, given to people with poor or incomplete credit histories, typically offer a low introductory rate for the first two or three years. The rate then resets for the duration of the mortgage, usually 30 years. About 100,000 such loans will reset each month over the next two years, according to research by UBS AG.

Foreclosures Climb

U.S. home foreclosures almost doubled in October from a year earlier as subprime borrowers failed to make higher payments on adjustable-rate mortgages, Irvine, California-based RealtyTrac Inc. said on Nov. 29.

The chief executive officers of Countrywide Financial Corp., the largest U.S. mortgage lender, and Washington Mutual Inc., the biggest savings and loan, endorsed Paulson's effort to negotiate the loan-modification plan.

Moody's Investors Service is preparing the biggest credit rating cuts since subprime mortgages contaminated the bond market. The ratings agency said on Nov. 30 it may lower ratings on $105 billion of debt sold by structured investment vehicles after the net asset values of 20 SIVs sponsored by firms including Citigroup Inc. declined to 55 percent from 71 percent a month ago. The assets were valued at 102 percent in June.

SIV Plan

A plan by banks including Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. to create an $80 billion fund to shore up the short-term credit market by buying up some of the $320 billion in assets held by the SIVs remains on track to be in place by the end of the month, Paulson said in the interview.

``It is still my expectation you will find this come together before the year end, and at the margin, it will help,'' he said. ``It is hard for the private sector to speak until they have it together. They think it is a good idea, we are helping to facilitate this.''

Paulson also reiterated his call for the Senate to pass legislation to help the Federal Housing Administration guarantee loans for delinquent borrowers. ``The administration is taking action to help homeowners, and Congress must do the same before it leaves for the year,'' he said in the speech.