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KAI RYSSDAL: As grim as the subprime situation appears at the moment — and it does — consider this. Interest rates on more than 2 million adjustable-rate mortgages are scheduled to re-adjust over the next couple of years. And when I say adjust I don’t mean those rates are going to go down. Think skyrocketing foreclosure rates and a spillover of the credit squeeze to Main Street. So the Bush Administration and big banks and mortgage lenders have been putting their heads together to find a way to help out homeowners who got in over their heads. The nuts and bolts won’t be announced until Tuesday, probably. But the headline here is a freeze on interest rates for certain subprime mortgages. Marketplace’s Amy Scott has more now from New York.
AMY SCOTT: The idea is to help out homeowners who borrowed money at low introductory rates, and now risk default as those rates reset higher. Banks may agree to extend the introductory rates for as long as five to seven years. Sarah Ludwig is executive director of NEDAP, an economic justice group. She worries that’s just postponing the pain.
SARAH LUDWIG: What’s gonna happen to all these borrowers in the next seven years, if they can’t gain access to sound, affordable, fair refinancing mortgages?
Then there are the investors who financed those mortgages. Susan Troll is a credit analyst with T. Rowe Price. She says investors who bought mortgage-backed securities assuming interest rates would rise might object to any changes.
SUSAN TROLL: A mortgage is a legal contract, and when you package it, and put it into a securitization, it’s governed by its own set of legal documents. And to suggest that you can go in and modify these loans on a grand scale basis seems like it would be very difficult to do without violating these legal documents.
Then again, foreclosure could be worse. Investors may feel it’s better to get some interest than none at all. Mickey Gooch is CEO of brokerage firm GFI Group. He says mass foreclosures don’t help anyone.
MICKEY GOOCH: It’s not gonna make the entire housing market turn around and happy days again, but it certainly means that thousands of homes that otherwise would have been joining the crowd of other homes in default will now be, you know, not on the market to sell.
The Treasury Department is expected to spell out details of the plan next week. It doesn’t have much time. Some $360 billion in adjustable-rate subprime mortages is due to reset next year.
In New York, I’m Amy Scott for Marketplace.
RYSSDAL: We could get more details on this whole thing Monday. There’s a big housing conference in Washington. The big mortgage lenders Countrywide and Washington Mutual are expected to be there. One more thing while we’re at it. A federal judge has named two big New York pension funds as the lead plaintiffs in a class action suit against Countrywide. Plaintiffs say the lender misled investors as the company was banging up against its subprime obligations and artificially underestimated its losses.
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