Plan may staunch subprime bleeding

Less than four months since subprime mortgages became a full-blown financial crisis, major lenders may be willing to forgo billions in increased payments on loans they granted while home prices were still surging.

The plan, being coordinated by Treasury Department officials, could be unveiled as early as next week. It would extend the current low-interest terms on some of the $500 billion in subprime mortgages that are resetting to much higher rates in the past three months of this year and through 2008. In Minnesota, lenders doled out $5.8 billion in new subprime first and second mortgages from 2004 through 2006.

Why would lenders agree to pass up the billions that they're set to collect on rising mortgage rates?

"What they want to avoid is customers mailing in their keys and walking away," said Mark A. Morgan, banking analyst at Rochdale Securities in New York City.

The value of houses is falling so fast as to wipe out the equity that many subprime owners have in their houses, he said.

Dramatic declines in home prices in many parts of the country probably would cost bankers billions more than they'll give up if a subprime interest freeze becomes a reality, Morgan said.

"If you look at delinquency loss curves, everything is going straight up," Morgan said. "That's the uncertainty that's motivating them to freeze" rates in the hope the borrowers can keep paying.

As one former Wall Street banker once said, "A rolling loan gathers no loss."

Treasury Secretary Henry Paulson said Friday that the plan will focus on borrowers who are still able to make their current payments but not the higher payments their loans would force on them otherwise.

Wells Fargo, Countrywide Financial and other big mortgage lenders are said to be negotiating on terms of the plan.

Defense against recession

White House officials, alarmed by the prospect of even more home foreclosures in 2008, are asking some of the country's biggest home lenders to freeze interest rates on some subprime loans. The hope is that regulators and bankers can erect a "bulwark," the White House said, against the housing sector's problems triggering recession.

While tens of billions have been written off by lenders in recent months, those losses have largely centered on securities that melded thousands of home loans -- good and bad -- into one bundle. The daunting task of evaluating individual subprime problem loans had just begun for many lenders, and most are ill-equipped to handle such a large number of problem loans on a case-by-case basis.

Proposal is being negotiated

The Treasury proposal being negotiated among the major lenders, would scrap "resets" that typically add 3 points to the price of a mortgage in a single jump. How long the freeze would last remains unclear, and it is uncertain how many mortgage holders would be able to participate in the program.

In theory, the plan could mean lenders nationwide give up as much as $15 billion in annual interest.

Wells Fargo officials declined a request for an interview about the talks. But in a statement, Michael Heid, co-president of Wells Fargo Home Mortgage, said the bank will keep in mind contractual obligations to investors who provided the cash for home mortgages, as well as the needs of customers.

"A good balance must be struck between upholding these obligations and meeting the needs of consumers," Heid said.

Some critics are wondering whether lenders are simply postponing a day of reckoning for themselves and for financially distressed homeowners.

"Everyone is pretending," said Prentiss Cox, associate professor of law at the University of Minnesota. "Nobody's accepting the loss that's out there. Nobody's recognizing the loss and booking it."

Mike Meyers • 612-673-1746