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US banks may agree to freeze sub-prime rates

Treasury, mortgage firms ironing out plan, say sources

(NEW YORK) The Bush administration is close to agreeing on a pact with major financial institutions that would temporarily freeze interest rates on certain sub-prime loans, the Wall Street Journal reported yesterday, citing sources familiar with the negotiations.

The plans’ details, which could be announced as soon as next week, are still being ironed out, the report said.

According to it, the accord is being negotiated between regulators including the US Treasury Department and a group of mortgage-related firms, including Citigroup, Wells Fargo & Co, Washington Mutual and Countrywide Financial Corp.

Sources with knowledge of the negotiations told the Journal that individual members have agreed to abide by any agreement reached by the coalition, which is called the Hope Now Alliance.

The newspaper said the coalition and the government have largely agreed to extend the lower introductory rate on mortgages for certain borrowers who will have trouble making payments when their mortgages increase.

To be determined, however, are exactly which borrowers would qualify for the freeze and for how long it would last, the Journal said, adding one scenario envisions a freeze lasting as long as seven years.

In California, four top mortgage lenders have agreed to a deal brokered by Governor Arnold Schwarzenegger to allow borrowers facing unaffordable resets to keep their lower initial rates five more years if they live in their homes and continue to make payments on time.

About US$890 billion of sub-prime US mortgages will have their rates reset next year, peaking in March, according to a report by the Organisation for Economic Co-operation and Development.

The Bush administration cut its growth forecast on Thursday, reflecting a deepening housing recession that’s roiled financial markets since August. The Commerce Department reported the same day that the median price of a new house fell 13 per cent in October from a year earlier, while fewer homes were sold than economists anticipated.

Delinquencies on sub-prime mortgages, which account for less than 15 per cent of the US$11.5 trillion US home mortgage market, climbed after what Fed officials have labelled ‘lax’ lending standards spread the past two years.

Homeowners were behind on 17 per cent of adjustable-rate sub-prime loans in June, compared with 4.2 per cent for prime mortgages of the same type, Mortgage Bankers Association data show.

The rout will get worse because defaults on home loans are likely to rise, analysts said. The Federal Deposit Insurance Corp estimates that 1.54 million non-prime mortgages valued at US$331 billion will reset by the end of next year.

Rising defaults ‘will take the housing market down another level’, said Mark Zandi, chief economist at Moody’s Economy.com. ‘In the context of an economy that is not in recession, but pretty close, we will be in a recession right in the teeth of a presidential election.’

More US homeowners fell behind on mortgage payments or even lost their homes last month compared to a year ago, a mortgage research company said on Thursday.

A total of 224,451 foreclosure filings were reported in October, up 94 per cent from 115,568 in the same month a year ago, according to Irvine-based RealtyTrac Inc.

The number of filings in October rose 2 per cent from September’s 219,850.

The US had one foreclosure filing for every 555 households in October, RealtyTrac said.


Source: Reuters, Bloomberg (Business Times 1 Dec 07)


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