Paulson: Subprime help on the way

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NEW YORK (CNNMoney.com) -- The U.S. government is working hard to give relief to struggling mortgage holders, Treasury Secretary Henry Paulson said Monday.

"We are working aggressively and quickly, utilizing available tools and creating new ones, to help financially responsible but struggling homeowners," he said in a speech at a housing conference sponsored by the Office of Thrift Supervision.

Paulson outlined the latest government and industry efforts to help struggling home owners keep their homes. The plan included reaching more struggling borrowers and finding affordable mortgage solutions.

He stopped short, however, on providing further details on a plan to freeze mortgage rates, but people close to the process say a plan could be announced this week.

Paulson said the Hope Now alliance, a coalition of lending industry executives, mortgage servicers, community groups and investors, which the Treasury Department helped put together, has already sent out thousands of letters to consumers who, because of resetting interest rates on adjustable rate mortgages (ARMs) may be in danger of falling behind on mortgage payments.

One of the worst problems lenders encounter in dealing with defaulting borrowers is their reluctance to contact the lender when they begin to fall behind. About half of all delinquent borrowers do not contact their lenders, according to Paulson.

He said Hope Now is sending out the letters 120 days in advance of the resets so borrowers have plenty of time to act before foreclosure hits and the letters include a hot line number where the borrowers can obtain almost instant advice.

Lenders are also considering several innovative programs, according to Paulson. They include both loan modifications and refinancings.

He added that many state and local governments, especially in the nation's hardest hit areas, are also trying out solutions, such as funds for financially-able borrowers to refinance out of expensive subprime loans.

"Given the local nature of housing markets, state and local solutions can be particularly effective," he said.

The Treasury Department is proposing that state and local governments be granted a temporary broadening of their tax-exempt bond programs to include mortgage refinancings. That will reduce the cost of innovative mortgage programs, Paulson said, and allow these programs to reach more struggling homeowners.

This fall, the Department of Housing and Urban Development initiated "FHASecure" to give the Federal Housing Authority the flexibility to help more families stay in their homes, even those who have good credit but may not have made all of their mortgage payments on time. Paulson estimated that 240,000 families can keep their homes by refinancing under FHASecure.

HUD secretary Alphonso Jackson, who spoke earlier at the conference, said more than 33,000 borrowers have already refinanced their subprime home loans with FHASecure, and an additional 20,000 are in the pipeline for approval this month, bringing the total to more than 53,000 in a four-month period.

Paulson also said that Hope Now is working on a plan to provide solutions for borrowers with resetting ARMs who can afford their mortgages as long as they only have to pay at the introductory interest rates; once these reset, the loans will become unaffordable. The challenge is to get these borrowers into more affordable mortgages.

Part of the difficulty is that these loans have been securitized and sold to investors all over the world, he said. The mortgage servicers are limited in the decisions they may make on behalf of these investors.

"We are determined to bring this diverse group together," said Paulson, "to develop a set of standards that will be implemented across the industry, from the largest mortgage servicers to the smaller specialty servicers. An industry-wide approach is critical to the effectiveness of this effort."

The Treasury Department is leading the effort to streamline the loan modification process, according to Paulson, so that it acts in the best interests of both borrowers and investors. But he stopped short of calling for an interest rate freeze for borrowers with resetting ARMs.

Investors in mortgage-backed securities represent one of the most significant barriers to freezing loan rates. The American Securitization Forum (ASF), which represents investors, does not support broad-brush, across-the-board solutions to the subprime ARM crisis.

In testimony before the House Financial Services Subcommittee on Friday, ASF Deputy Executive Director Tom Deutsch said modifications are preferable to foreclosure in certain cases, but they "should be considered and made on a loan-by-loan basis."

According to Paulson, the efforts not only will help the borrowers themselves but will also, by preventing foreclosures and sales which can drive down property values, help maintain the financial stability of entire communities.

He added, "It also helps investors and lenders avoid unnecessary and costly foreclosures that are not in their interest."

Critics say Paulson's outline doesn't go far enough.

Michael Shea, director of housing at consumer advocacy group ACORN, said he heard from lenders that the plan will probably only help borrowers with hybrid ARMs who aren't delinquent but are likely to be when their loans reset to a higher rate. That represents just a narrow slice of the subprime borrowers in trouble, he said.

"It's a total joke," said Shea. "It helps. Don't get me wrong. . . .But it's disappointing that we are nearly a year into the crisis and the Treasury Secretary is dealing with the easiest part of the problem."