Can Treasury Secretary Henry Paulson Convince the Mortgage Industry To Bailout Suprime Borrowers?

Implications: The downturn in the housing market has made banks reluctant to sink money into anything related to real estate and foreclosures are on the rise. U.S. banks and thrifts may have good reason to be concerned about lending as provisions for loan losses rose in 3Q07 and banks set aside $16.6 billion to cover loan losses, which is up from $9.2 billion in 3Q06. In addition, the amount of loans and leases that were 90 days or more past due rose by $16 billion and loans secured by residential real estate accounted for more than half of the growth. Residential mortgage loans which were 90 days or more past due increased by $7.5 billion and past due HELOCs (home equity line of credit) rose by $783 million. Treasury Secretary Henry Paulson is devising a plan to bailout subprime borrowers by trying to convince mortgage lenders to freeze rates and state and local governments to issue tax-exempt bonds to fund programs to prevent foreclosures. Paulson plans to finalize the deal this week.

Analysis: Treasury Secretary Henry Paulson is working with the mortgage industry to establish an industry wide approach to provide aid to subprime borrowers who are at risk of loosing their homes as mortgage rates readjust, which could cause mortgage payments to balloon and could lead to more foreclosures by the end of 4Q07. Paulson is enlisting the help of state and local governments to fund programs that would prevent foreclosures and reaching out to subprime borrowers with steady income and good repayment histories to refinance their mortgage at a lower rate and working with mortgage lenders to freeze the rate for those borrowers in an attempt to prevent more foreclosures.

1.  Paulson is also calling on Congress to pass bills to expand the availability of FHA insured loans and to have greater oversight over mortgage giants Fannie Mae and Freddie Mac

2.  In an attempt to slowdown losses in the mortgage industry, the Federal Reserve injected billions of dollars into the banking system after what was perceived as a collapse of the U.S. subprime mortgage industry

Takeaway:  Paulson has his work cut out for him as he attempts to convince executives across the mortgage industry as well as state and local governments to bailout subprime borrowers. Is this a band-aid approach to the U.S mortgage crisis or will this lead borrowers into safer and sustainable loans to help them keep their homes? It's too early to determine if Paulson's plan will alleviate some of the bleeding in the industry as more writedowns are expected at top banks in 4Q07, whose assets are tied to subprime mortgages.