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Troubled banks want to transfer some mortgage risks to US govt

New proposal for delinquent borrowers to refinance into loans backed by state

THE United States banking industry, struggling to contain the fallout from the mortgage debacle, is now proposing to move some of the risk for troubled housing loans to the government, The Wall Street Journal reported yesterday.

One proposal, being urgently advanced by officials at Credit Suisse Group, calls for the Federal Housing Administration (FHA), a US government agency, to guarantee mortgage refinancing by some delinquent borrowers, said the paper.

Credit Suisse officials have met senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policymakers to discuss the proposal, it added.

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

Just a few months ago, such a proposal would have been considered unreasonable. But the fact that the plan is receiving serious consideration suggests the level of concern in Washington, as housing problems worsen and efforts to tackle them fall short, said the report.

A plan by banks to rescue bank-affiliated funds that had invested in mortgage-backed securities fell through, while a hotline for troubled borrowers has helped only a small fraction of those in need.

This week, the government announced its latest idea – Project Lifeline – a mortgage-industry plan that would give seriously delinquent borrowers extra time to avoid foreclosure.

The Credit Suisse plan would open the way for nearly 600,000 sub-prime borrowers, many of whom are delinquent on their mortgages, to refinance into loans backed by the FHA, said the Journal.

Around 1.3 million borrowers in the US were either seriously delinquent or in foreclosure at the end of the third quarter, according to the latest figures from the Mortgage Bankers Association.

Credit Suisse said the plan would make US$89 billion (S$126.1 billion) in sub-prime loans eligible for refinancing.

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. Home owners with FHA insurance pay premiums into an insurance fund.

Another bank, JPMorgan Chase, is putting together its own proposal to expand the number of home owners who could refinance into FHA-backed loans, said the Journal.

 

Source: The Straits Times 15 Feb 08

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