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A plan to refinance or freeze the interest rates on up to 1.2 million subprime adjustable-rate mortgages for five years is not a “silver bullet” solution for all homeowners, but will help reduce the impact of the housing downturn on the economy and communities affected by foreclosures, Treasury Secretary Henry Paulson said Thursday.

Paulson was the point man as the Bush administration rolled out a much-anticipated agreement with mortgage lenders and loan servicers in the face of criticism not only from consumer advocates — some say it won’t help enough borrowers — but warnings from some in the lending industry who said an interest rate freeze could discourage investors from financing future loans.

The agreement has the backing of the American Securitization Forum, which represents companies that issue mortgage backed securities, as well as investors, loan servicers and rating agencies. ASF Executive Director George Miller said the agreement provides a common framework to evaluate borrowers’ situations, and expedites processes for loan servicers to pursue refinancing and loan modification options on a more systematic basis.

The ASF today published a 34-page document outlining procedures for servicers to follow in streamlining refinancings or loan modifications on ARM loans that are scheduled to reset in the next 2 1/2 years.

Paulson said he hoped that the guidelines would be adopted as “customary standard practice across the entire servicing industry,” because the current system would “not be sufficient” to handle the 1.8 million owner-occupied subprime ARM resets expected in 2008 and 2009.

According to the framework, loans eligible for streamlined refinancing or modification such as an interest rate freeze must be ARM loans on owner-occupied homes originated between Jan. 1, 2005 and July 31, 2007, with an initial interest rate reset between Jan. 1, 2008 and July 31, 2010.

Under the guidelines, only borrowers with FICO scores less than 660 and facing an increase in monthly payments greater than 10 percent will be eligible for fast-track loan modifications. Borrowers who don’t meet the “FICO test” may qualify for loan modifications after individual reviews of their current income and debt obligations.

Although the Bush administration says up to 1.2 million ARM loans may be eligible for refinancing or modifications, the Center for Responsible Lending, estimated that a much smaller number of families — perhaps 145,000 — will actually see any relief.

The administration’s estimate is based on the belief that nearly two-thirds of the 1.8 million homeowners with subprime ARM loans facing interest rate resets in the next two years can afford their introductory rate, but won’t be able to afford higher payments after their loans reset.

But many subprime borrowers have second, “piggyback” mortgages that pose obstacles to loan modifications, CRL warned, and loan servicers will still have financial incentives to foreclose on loans, rather than engage in workouts.

“The plan relies on voluntary decisions by individual mortgage servicers and investors, (and) does not remove the strong financial and legal incentives servicers have to foreclose on loans rather than modify them,” CRL said in a statement. “Recent experience shows that the likelihood of widespread modifications is small under this ‘business as usual’ approach.”

CRL said Congress should also allow bankruptcy judges to modify the terms of mortgage loans for borrowers who file for Chapter 13 bankruptcy protection, saying it could prevent up to 600,000 foreclosures. The lending industry opposes pending legislation that would change the bankruptcy code to do just that, saying it would raise the cost of borrowing (see Inman News story).

The rating agency Standard & Poor’s issued a report raising concerns that wholesale interest rate freezes on subprime ARM loans could force it to lower its ratings on subprime mortgage-backed securities (MBS). Such concerns have prompted others in the industry to warn that wholesale loan workouts will discourage investment in MBS, worsening the ongoing credit crunch.

Paulson said the plan, while not perfect, is part of a broader effort the Bush administration has undertaken to address the housing downturn. Those efforts are in two areas, he said: limiting the impacts of the current downturn, and taking steps to protect housing and credit markets in the future by tightening regulations.

To limit the impact of the current downturn, the administration’s FHASecure program allows some homeowners who are already in default to refinance into loans guaranteed by the Federal Housing Administration (FHA). HUD Secretary Alphonso Jackson said today that FHA has received 118,000 refinance applications since the program was announced in September, and that 35,000 homeowners have already refinanced into FHA-backed loans.

Jackson said FHA expects to process another 50,000 refinance loans by the end of the year, and that a pending bill to lower FHA down payment requirements, allow it to insure larger mortgages, and expand “risk-based” pricing, would allow FHA to back an additional 250,000 loans by the end of 2008. All told, Jackson said, FHA may be able to guarantee up to 800,000 loans in fiscal year 2008.

On the regulatory front, President Bush said at a press conference today that the Federal Reserve will announce stronger lending standards later this month. HUD and federal banking regulators, Bush said, are taking steps to improve disclosure requirements.

Bush chastised Congress for failing to pass an FHA modernization bill or legislation to reform oversight of the government-sponsored enterprises Freddie Mac and Fannie Mae.

Paulson and James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO), echoed the president’s call for a GSE modernization bill.

Lockhart said Fannie Mae and Freddie Mac “have played an extremely important role in supporting the mortgage market as all the problems erupted this summer,” growing their market share of all new mortgages to more than 60 percent, up from 38 percent last year.

Although the House passed a GSE reform bill in May, there is disagreement in the Senate over limits on Fannie and Freddie’s loan portfolios and whether to raise the $417,000 conforming loan limit.