Feds plan help for subprime homebuyers

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KAI RYSSDAL: In Washington today, the House took up a bill that would overhaul the Federal Housing Authority. It would also create a multi-billion dollar trust fund for low-income housing.

Not to be outdone, the White House unveiled its own plans for easing the woes of subprime home buyers this morning. Treasury Secretary Henry Paulson made the announcement: The government’s going to be teaming with credit counselors and the mortgage industry to see what they can do to help borrowers avoid foreclosure.

Marketplace’s Steve Henn reports it’s not all altruism.

STEVE HENN: In the next year, more than two million subprime loans are going to reset — that means these borrowers will soon be paying hundreds of dollars more each month for their mortgages. And the industry is terrified many will default.

GEORGE MILLER: No one benefits from mortgage defaults and foreclosures.

George Miller is the executive director for a trade group that represents investors that buy bundles of home mortgages re-packed into securities. If the tide of foreclosures in America keeps rising, his members stand to lose a fortune.

Will Wheaton, a real estate economist at MIT, says there is an informal rule of thumb about losses lenders suffer when the take a house back:

WILL WHEATON: It tends to be 20 percent of the value of the house — not the value of the loan, but the value of the house, when you take a house in foreclosure.

So Miller’s group and other big lenders joined administration officials today to encourage distressed borrowers to refinance, or even renegotiate their loans.

ANTHONY PENNINGTON-CROSS: In some sense this is kind of a flip-flop.

Anthony Pennington-Cross studies the industry at Marquette University. He says it used to be when you were behind on your payments and you called your lender, they’d say, “Sorry, we sold the loan. We can’t change the deal.”

PENNINGTON-CROSS: I think if you asked the non-profits or the people who were trying to do re-negotiations early, they got the answer “No, you can’t do it.” And now we are getting the answer “Well, yeah, you probably can.”

Pennington Cross says the industry players now realize if they don’t cut deals with distressed borrowers they could lose their shirts.

I’m Steve Henn for Marketplace.