The top executives of the two government-sponsored enterprises, Fannie Mae and Freddie Mac, told the House Committee on Financial Services today that they plan to offer programs to help homeowners facing delinquent subprime loans with opportunities to refinance and stay in their homes.
The subprime mess has reached crisis proportions as the widely cited Center for Responsible Lending reports that 4 percent of U.S. homeowners--or about 2.2 million--face the prospect of losing their homes. Subprime defaults are particularly acute in economically distressed areas such as the Midwest, and in Gulf Coast states such as Mississippi and Louisiana.
Daniel Mudd, Fannie Mae's president and CEO, estimates that roughly 1.5 million homeowners who face resetting ARMs and payment shock this year could be eligible for Fannie Mae's loan options.
"Right now, we're getting at least 15,000 applications for subprime refinancing coming into our system per month," Mudd told the committee, adding that through its new HomeStay initiative, Fannie Mae will offer 30- and 40-year fixed-rate mortgages through roughly 2,000 lenders nationwide.
"These loans include our usual borrower-friendly options such as low down payments, long-term fixed rates, low fees and points, a prohibition on pre-payment penalties, and a ban on arbitration clauses," Mudd said, pointing out that homeowners facing imminent payment shock will be able to refinance into a Fannie loan without first having to clear-up unpaid bills on their credit reports.
Richard Syron, chairman and CEO of Freddie Mac, said his organization will have financing alternatives for troubled homeowners by mid-summer. He said the offerings will include 30-year and possibly 40-year fixed-rate mortgages and ARMs with reduced margins and longer fixed-rate periods.
"The one thing we need to do is distinguish between those borrowers who can be rescued and those who cannot," Syron said. "I realize such a triage will not be easy or popular, but policy prescriptions such as widespread 'bailouts' or foreclosure moratoriums should be considered only in certain extreme situations, such as in the aftermath of natural disasters," he continued.
Syron may have been referring to last week's proposal by Sen. Charles Schumer (D-N.Y.), who supports a government bailout for homeowners facing foreclosure due to predatory subprime loans.
"I can't agree with taking taxpayer dollars to address this problem, that's premature in my judgment," said Rep. Spencer Bachus (R-Ala.), the ranking Republican on the House Financial Services Committee.
"What we're looking to do today is to see what legislation is needed moving forward," said Rep. Barney Frank (D-Mass.), who chairs the House committee.
"There's an element of concentration to these loans where blight and other economic problems [may increase] ... and we have to figure out what we can do to help people in these situations," Frank concluded.