Criticism rains down on mortgage industry

In light of the bruising publicity, shrinking income from delinquent loans and threat of further regulation, the mortgage industry is under growing pressure to help more homeowners in trouble. Most of the largest lenders have loosened their guidelines for modifying loans, where they can. On Tuesday, Countrywide Financial, cfc the nation's largest mortgage lender, will announce plans to refinance or modify $16 billion in subprime ARMs that will reset through next year.

But the problems that created the mortgage crisis are complex, which makes it harder to find fast and broad-brush solutions.

The majority of loans made in recent years were bundled and sold as securities, which have contractual terms that make it harder to renegotiate with delinquent borrowers. What's worse is that lending standards last year and early this year were recklessly low. Fraud was rampant. Many of the subprime borrowers who got loans simply shouldn't have. Those loans — no one knows how many — can't be saved.

Proposals to help

Federal and state policymakers, meantime, have been proposing a flurry of measures to help homeowners and to exert more control over the mortgage industry. The Bush administration unveiled a plan in August to reform the Federal Housing Administration and change the tax code. House and Senate committees have held hearings and voted on legislation to give housing agencies more latitude to help troubled homeowners. But it's unclear when any laws will be passed or how many homeowners they can rescue.

House Financial Services Chairman Barney Frank, D-Mass., said Monday he's "not encouraged" by the pace of the financial industry's response to try to restructure loans. He's planning a regional meeting with lenders, servicers and community groups to try to spur better communication and faster action on loan restructurings or workouts.

In a speech last week, Treasury Secretary Paulson warned that there's an "immediate need" for lenders to modify and refinance more loans. The housing downturn, Paulson declared, is "the most significant current risk to our economy" — a view shared by Federal Reserve Chairman Ben Bernanke.

More evidence of that risk is expected Wednesday and Thursday when figures on September home sales will be released. The numbers are expected to be dismal, with sales in the San Francisco area, for example, off 40% from a year ago, according to DataQuick Information Systems. Nationwide, foreclosed homes are swelling the glut of homes for sale. Those homes are weighing down property values and hurting sellers who've paid their loans on time.

Brian Bethune, an economist at forecasting firm Global Insight, predicts that the economy will feel the brunt of the housing problems well into 2008. Global Insight expects the drop in residential investment to subtract what he calls a "massive" 1.5 percentage points from economic growth over the next six months. Considering that the potential growth rate of the economy is about 2.8%, that's effectively like "having a baseball team and instead of putting out nine players, you put out five," Bethune says.

Economic fears will put pressure on the Federal Reserve to cut interest rates again when it meets next week. Yet some economists, such as Edward Leamer of the UCLA Anderson Forecast, don't think another cut is the answer. "The (Fed policymakers) need to close their eyes and pray at this point," Leamer said. "A cut in rates isn't going to revive the subprime market."

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