Treasury Secretary Henry Paulson is trying to reassure investors that the U.S. will "work through" the problems of a turbulent credit market "just fine." But in a CNBC interview Tuesday, Paulson cautioned that there's no "quick solution."
That point was underscored by more worrisome data on home foreclosures: Foreclosure filings nearly doubled in July from the same time a year ago, according to the research firm RealtyTrac.
Senate Banking Committee Chairman Christopher Dodd (D-CT) held a private meeting Monday with Paulson and Federal Reserve Chairman Ben Bernanke. Dodd, who is running for president, complained afterwards about adjustable-rate mortgages that start with low monthly payments but quickly ratchet up.
"We may have as many as a million to 3 million people who could lose their homes — not because they lost their jobs, not because the economy collapsed, but because they got bad deals on mortgages," Dodd said.
Dodd encouraged people who are facing foreclosure to call a national hot line (888-995-HOPE) run by NeighborWorks America, a nonprofit group. The group offers financial counseling to homeowners and tries to renegotiate more favorable mortgage terms.
Helping Homeowners Renegotiate Loans
"What we often shoot for in that negotiation is a fixed rate and stretching the term back out to 30 years," said Gabe del Rio, vice president of lending with the group's San Diego affiliate. "That essentially provides a refinance product without going through a refinance."
That's important because in areas where home prices have fallen, distressed owners may not qualify for traditional refinancing of their mortgages.
The Neighborhood Assistance Corporation of America is also offering 30-year mortgages with low fixed rates to borrowers who've been victims of predatory lenders. The nonprofit group has access to $10 billion worth of loans, including $1 billion set aside for people at risk of foreclosure.
"That is a drop in a huge bucket," said CEO Bruce Marks. "The problem is, it's the only drop right now. So our goal is not just to provide people with the opportunity to refinance, but to force the major lenders to restructure their loans to make it affordable."
Dodd said the government-sponsored agencies Fannie Mae and Freddie Mac could encourage more favorable loans to distressed borrowers, if the Bush administration would relax restrictions on them. Paulson dismissed that idea, but said the administration is studying other ways to help troubled borrowers.
Eyeing the Practices of Ratings Agencies
Dodd also said the government needs to look at some underlying problems with the market, including the role of credit rating agencies. Until recently, Moody's, Standard and Poor's, and other agencies gave top ratings to securities backed by home mortgages — even those that turned out to be at high risk of default.
"These ratings were way, way off," Dodd said. "And obviously, there's an inherent problem if the agencies are being paid by the very people they're rating. You have some legitimate underlying questions of how reliable those ratings can be."
Rating agencies are paid by the Wall Street firms that bundle mortgages into securities for sale. The rating agencies coached Wall Street on just how many risky mortgages they could pack in, said finance professor Joseph Mason of Drexel University.
"The builders of the securities wanted to push the envelope. And I would say that the credit rating agencies, in order to maintain business in this highly lucrative and fast-growing area, went along with the game," Mason said.
Those credit ratings turned out to be overly optimistic. And when more and more homeowners started defaulting on their mortgages, investors were caught off guard, setting the stage for the current credit backlash.
Mason said that while many investors rely on credit ratings, there are few objective standards. A mortgage-backed security might boast the same high rating as a corporate bond, even though it carries up to 10 times the default risk. When rating agencies have that much leeway, it's little wonder they can be swayed by the people paying their fees, Mason said.
"Regulators don't seem to want to acknowledge that they've handed over this broad authority to the credit rating agencies. Now the credit rating agencies have responded to being handed that broad authority by selling it," Mason said.
Standard and Poor's declined to comment on the criticism. Moody's didn't return a call for comment. In recent weeks, rating agencies have been steadily downgrading securities backed by high-risk mortgages — a move critics say is too little, too late.
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