Paulson Shifts on Mortgages

Treasury Secretary Seeks Broad Moves by Lenders; 'Not Business as Usual'

U.S. Treasury Secretary Henry Paulson, concerned that millions of homeowners aren't being helped quickly enough, is pressing the mortgage-service industry to help broad swaths of borrowers qualify for better loans instead of dealing with mortgage problems on a case-by-case basis.

In an interview, Mr. Paulson said the number of potential home-loan defaults "will be significantly bigger" in 2008 than in 2007. He said he is "aggressively encouraging" the mortgage-service industry -- which collects loan payments from borrowers -- to develop criteria that would enable large groups of borrowers who might default on their payments to qualify for loans with better terms.

That's a shift from his previous view that the problems didn't warrant a group approach. Mr. Paulson said his outlook has evolved as he has learned more about the problem.

"We're never going to be able to process the number of workouts and modifications that are going to be necessary doing it just sort of one-off," Mr. Paulson said. "I've talked to enough people now to know there's no way that's going to work."

The momentum for a new approach received a boost yesterday when four major mortgage-loan servicers, including Countrywide Financial Corp., and California Gov. Arnold Schwarzenegger agreed to endorse a plan for temporarily freezing interest rates to help borrowers in good standing from facing foreclosure when their loans reset to higher interest rates.

The Bush administration has been looking for ways to stem the fallout from rising defaults on mortgages to subprime borrowers, or those with poor credit, which have roiled financial markets and bled into the broader housing sector. Amid wrangling between Congress and the White House over how best to do that, Mr. Paulson said the administration's approach is "the right thing to be proposing" and will help to keep homeowners in their homes.

While he stopped short of endorsing a proposal by Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., to have mortgage companies freeze the interest rate on the two million mortgages due to reset to higher rates between now and the end of 2008, he said that's "one idea." Mr. Paulson said he supports finding some way to develop "standard criteria that's going to allow for modification and workouts."

Defaults and foreclosures are increasing as borrowers -- many of whom got loans that allowed them to make no down payment or to initially pay interest only -- begin having trouble making their mortgage payments as higher rates kick in. Many homeowners believed they could refinance, but that has become harder as housing prices slide and lenders tighten standards.

Mr. Paulson faulted Congress for failing to pass several bills that could potentially provide relief for borrowers, and took aim at a Republican senator who is holding up a piece of legislation that would allow the Federal Housing Administration to play a greater role in the cleanup. While the Bush administration and Democrats in Congress backed the bill, Oklahoma Republican Sen. Tom Coburn objected, saying it will result in additional risky loans for which taxpayers will be liable.

Mr. Paulson said he understands Mr. Coburn's concerns, but notes: "This is not business as usual. This is an extraordinary situation."

He also called the Senate's failure to pass legislation overhauling mortgage giants Fannie Mae and Freddie Mac "very frustrating," saying that the two government-sponsored entities need to be playing a bigger role in the housing market.

"If we ever need them it's during times like today, and they're most valuable when there is distress in the mortgage market," he said. "I'd like to see them playing an even bigger role."

Fannie and Freddie, however, have recently posted losses that could hamper their ability to buy mortgages, since they are required to keep a hefty capital cushion.

Mr. Paulson declined to say whether he would back efforts to lift those minimum capital requirements, saying such a decision was best left to the Office of Federal Housing Enterprise Oversight, which regulates Fannie and Freddie. "It would be particularly inappropriate for me to get between the regulator and Fannie and Freddie given what's going on," he said.

Mr. Paulson wants Congress to temporarily allow Fannie and Freddie to purchase mortgages larger than their current limit of $417,000, a move some believe would improve the availability of the larger "jumbo" mortgages.

But the Bush administration doesn't want to expand their role unless such a move is accompanied by tighter oversight of the two entities. The House has passed a bill but similar legislation has gone nowhere in the Senate.

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About Safeguard
Safeguard Properties is the largest privately held field services company in the country. Located in Cleveland, OH  and founded in 1990 by Robert Klein, Safeguard has grown from a regional preservation company with a few employees and a handful of contractors performing services in the Midwest, to a national company with over 425 employees.  Safeguard is supported by a nationwide network of subcontractors able to perform any requested superintendence, preservation, and maintenance functions, as well as numerous ancillary services in the U.S., the Virgin Islands, and Puerto Rico.