AMY TIERCE
Loans not owned

A U.S. government-backed plan to freeze mortgage interest rates for five years for certain subprime mortgage borrowers is drawing local reaction that’s guarded at best.

Massachusetts lenders, housing advocates and analysts predicted the effects of the plan will be limited because borrower eligibility is restricted and since so many parties will have to agree in order for it to work.

“My biggest question is, who will negotiate this?” said Amy Tierce, regional manager of Fairway New England Mortgage in Needham and a board member of the Massachusetts Mortgage Bankers Association.

“Nobody owns these loans anymore,” she said.

Today’s mortgage marketplace, in which roughly four-fifths of 2 million outstanding subprime mortgage loans have been packaged and sold as securities to investors, is markedly different from that of the recession in the early 1990s, Tierce noted. New England saw far more foreclosures then, but most loans were owned, serviced – and worked out, if necessary – by the lenders who originated them.

MMBA Executive Director Kevin Cuff said the prospect of renegotiating terms and conditions on loans sold to others after the terms were set sounds like a potential “minefield” to him.

Cornelius Hurley, a Boston University law professor and director of BU’s Morin Center for Banking and Financial Law, added that any proposal that attempts to override existing service and payment contracts will be problematic.

“You’ll have to put me in the skeptical column,” Hurley said, “for that and other reasons.” Presidential election-year politics often result in “games of one-upsmanship rather than the most practical solutions” to problems, he added.

President Bush announced the plan for the rate freeze Dec. 6. At least three Democratic presidential contenders – Hillary Rodham Clinton, John Edwards and Barack Obama – have announced their own mortgage crisis rescue plans.

A spokesman for the Washington, D.C.-based Mortgage Bankers Association, which was a member of the coalition of servicers, investors and industry trade groups (dubbed HOPE NOW) that agreed to the rate-freeze plan, said it’s important to remember that many borrowers will be helped by a large-scale freeze. He pointed to U.S. Secretary of the Treasury Henry M. Paulson Jr.’s statement that up to 1.2 million U.S. subprime borrowers will be eligible under the plan.

“The current [case-by-case basis] system for working out Â… problem loans would not be sufficient to handle the anticipated 1.8 million owner-occupied subprime mortgage resets that will occur in 2008 and 2009,” Paulson said when the plan was announced.

Paulson and Department of Housing and Urban Development Secretary Alphonse Jackson organized the HOPE NOW coalition.

The American Securitization Forum, an advocacy group that represents companies that package mortgages into securities, devised the guidelines to which the coalition agreed. They state that borrowers who are still current on their loans, have credit scores lower than 660, and who have so-called 2/28 or 3/27 adjustable-rate subprime loans originated between Jan. 1, 2005, and July 30, 2007 – and scheduled for an interest rate reset in 2008 or 2009 – are eligible for rate freezes.

Other borrowers will be designated eligible for refinancing or able to afford a higher interest reset rate.

‘A Positive Step’

Those criteria make Massachusetts advocate Robert Pulster, executive director of Jamaica Plain-based ESAC (Ensuring Stability Through Action in our Community), and ESAC Foreclosure Prevention Counselor Steve Bennett wonder how many actually will benefit.

“Singling out people with good credit [660 credit scores] so they don’t qualify doesn’t make sense to me,” Pulster said.

People with higher credit scores are more likely to be able to repay loans and keep their homes, so eliminating them from consideration for a rate freeze doesn’t seem logical, he added.

Bennett said the rate freeze will be “a start” down the road to helping borrowers, but doesn’t know of any who have benefited yet.

ESAC has helped about 20 borrowers – 7 percent of those whose cases they have taken on – modify their loans since January.

Bennett suggested that the “real favor” to borrowers would be to reduce rather than freeze their interest rate. The average introductory rate on a subprime loan in 2006 was 8.5 percent, he said.

But George Miller, executive director of the American Securitization Forum, has predicted the industry will face lawsuits from investors unhappy with the rate-freeze plan as it stands now, since it modifies existing loan terms, the Associated Press reported.

Brian Koss, a managing partner at Mortgage Network in Danvers, and former employee of major national loan servicer Countrywide Financial Corp., said that if anyone should be ineligible for help via the rate-freeze plan, it should be investors and speculators, as opposed to buyers who wanted to put a roof over their heads.

“A lot of people here in New England who took out the 2/28 and 3/27 adjustable-rate loans were investors,” said Koss. “If an investor already has enough money and is just speculating to make more money,” he said, “then they shouldn’t be helped.”

He agreed it will be “hard to put a face” on who has to agree to a rate freeze.

National servicers such as Countrywide, Wells Fargo, Ocwen, Option One and Bear Stearns are among those who will have to sign on.

“These are not [local] bank presidents,” Koss said, but major companies based outside Massachusetts.

California-based Countrywide and Iowa-based Wells Fargo have issued statements saying they support the rate freeze. Countrywide has identified 82,000 borrowers who will be eligible either for a refinance or a freeze, the company said.

U.S. Rep. Barney Frank, D-Mass. and chairman of the U.S. House Financial Services Committee, separately warned that it is important that borrowers be made aware they can apply for a rate freeze.

If the program is not “aggressively promoted,” Frank said in a prepared statement last week, “hundreds of thousands of families will lose their homes and the inventory of vacant properties will continue to grow.”

A separate but related effort to help borrowers in trouble by modifying their loans is making its way through Congress in the form of Senate Bill 2136, which was introduced by Sen. Richard Durbin, D-Ill. The bill would allow federal bankruptcy judges to modify mortgage loan terms and home values.

The Massachusetts Bankers Association does not support the legislation, according to Director of Federal Regulatory and Legislative Policy Jon Skarin. “It would be a significant change in the current bankruptcy laws,” giving bankruptcy judges “basically unlimited authority to restructure mortgage contracts,” he said.

But MBA sees the rate-freeze plan as “a positive step,” he added – as far as it goes.

“It’s limited in who it applies to, but Â… for those it can help, it will buy them some time to maybe get out of their property or refinance,” Skarin said.