Worried bankers seek to shift risk to Uncle Sam


By Damian Paletta
The Wall Street Journal
Thursday, February 14, 2008

WASHINGTON -- The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government.

One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers.

Credit Suisse officials have met with senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policy makers to discuss the proposal.

The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss.

That the plan is receiving serious consideration suggests the level of concern in Washington as housing problems worsen and early efforts by the Bush administration fall short.

Last fall the government backed a plan by banks to rescue bank-affiliated funds that had invested in mortgage-backed securities, but it fell through. More recently, a hotline set up with Washington's support for troubled borrowers has helped only a small fraction of those in need.

Politicians and bankers are now abuzz with talk about broader ideas to prevent the housing market from deteriorating.

Another plan gathering support seeks to make it easier for banks to write off part of the unpaid balance on loans that exceed a property's value, people familiar with the matter said. If that happens, homeowners would owe less, and they might be able to refinance their loans and avoid foreclosure.

Several lenders are already considering the move, known as a "principal charge-off," but are hesitant to move forward. Loan servicers -- the companies that collect monthly mortgage payments -- worry that if they take big write-offs, they might be sued by investors who hold mortgage-backed securities. However, if the industry came forward with a standard backed by the Treasury Department, the legal concerns would likely fade.

"Everybody is looking at everything," Federal Deposit Insurance Corp. Chairman Sheila Bair said yesterday after a speech in Washington. "The door is not closed on anything."

The Credit Suisse plan would open the way for nearly 600,000 subprime borrowers, many of whom are delinquent on their mortgages, to refinance into loans backed by the FHA. Some 1.3 million borrowers were either seriously delinquent or in foreclosure at the end of the third quarter, the most recent numbers available from the Mortgage Bankers Association.

The FHA was created during the Great Depression and provides mortgage insurance for qualified borrowers. The agency grew less popular during the recent housing boom because credit was widely available, but it has recently rebounded as some credit markets have dried up. Homeowners with FHA insurance pay premiums into an insurance fund.

In a 20-page summary handed out to lawmakers, policy makers, and regulators, Credit Suisse said the plan would make $89 billion in subprime loans eligible for refinancing. Credit Suisse spokeswoman Victoria Harmon said bank officials have "shared our ideas and technical advice on FHA" and received "constructive" responses from the government.

Officials from J.P. Morgan Chase & Co. are pulling together their own proposal to expand the number of homeowners who could refinance into FHA-backed loans.

Just a few months ago such proposals would have been considered farfetched, but these and other unorthodox ideas are gaining credibility. This week the government announced the latest idea, a mortgage-industry plan that would give seriously delinquent borrowers extra time to avoid foreclosure.

So far the government's moves haven't propped up the sagging housing market or thawed frozen credit markets. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are expected to face questions on these issues today from lawmakers at a Senate Banking Committee hearing.

The panel's chairman, Sen. Christopher Dodd, D-Connecticut, is working on a plan that would resurrect a federal agency created during the 1930s to buy up distressed mortgages at steep discounts and help borrowers refinance into more-affordable loans.

Senior Treasury Department officials have been wary of proposals that could expose taxpayers to losses and bail out lenders, but they have been willing to entertain most ideas. Some congressional Republicans are becoming worried that as more bad news and data are released about the housing market, some proposals could expose taxpayers to severe losses.

"I would share the concern and nervousness about going in that direction," said Rep. Scott Garrett, R-New Jersey, a member of the House Financial Services Committee.

Sen. Charles Schumer, D-New York, this week urged the lending industry to move toward a standard of partially writing down the principal of "under water" loans, where the borrower owes more than his home is worth.

Separately, Senator Schumer called the Credit Suisse plan "an interesting idea, which we are looking at pretty seriously." However, Credit Suisse hasn't won the endorsement of the American Securitization Forum, an influential group of investors.

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