Are Plan's Critics Also Investors?
FDIC Chief Fears
Bets on Foreclosures
By MICHAEL M. PHILLIPS
December 8, 2007; Page A3
WASHINGTON -- A top federal bank regulator said some investors who are criticizing the new rescue plan for troubled homeowners also may be placing bets in which they would benefit from a jump in foreclosures.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., suggested hidden financial motives may be coloring the debate over the plan, unveiled by the mortgage industry and endorsed by President Bush this past week.
• The Statement: The head of the FDIC says she suspects some investors are opposing a plan to freeze rates for some subprime borrowers because they will profit from higher foreclosures.
• The Limitation: She says she doesn't have evidence of this.
• Why It Matters: Officials are trying to combat criticism that the plan represents a bailout.
The plan would grant interest-rate freezes for certain borrowers who are unlikely to be able to afford the interest-rate increases scheduled to hit their subprime mortgages over the next two years.
"I do worry that some of the investors have taken short positions on the ABX," an index based on subprime-mortgage-backed securities, Ms. Bair said in an interview.
Ms. Bair, who was a leading figure in developing the mortgage-rescue plan, didn't identify specific investors who she believes are shorting the market. She said she had no evidence to back up her concern.
Interest rates on an estimated 1.8 million subprime mortgages are scheduled to increase before the end of 2009, raising the specter of hundreds of thousands of foreclosures and a further hit to battered home prices that could push the economy toward recession.
The plan seeks to help home borrowers who are current on their loans. Some of those borrowers would qualify for a five-year extension on the introductory interest rates on their mortgages.
About 95% of those subprime mortgages, which generally go to borrowers with weaker credit records, are now packaged into securities. The rescue package requires the cooperation of many of the investors who own those bonds. Some have criticized the plan, saying it would reward reckless borrowers while cutting into their own income. Others say the plan doesn't go far enough.
Ms. Bair said relaxing the mortgage terms is the only way to prevent a wave of foreclosures that would depress house prices and hurt everyone, including investors. "It's in everybody's interest to modify these loans," she said. "If you're in a down market, closing out a property almost never makes sense because you're going to have to settle for a significant loss."
George P. Miller, executive director of the American Securitization Forum, didn't dispute the notion that some investors who stand to incur losses from looser mortgage terms are opposing the plan. "It's to be expected that an investor's view of this could reflect their position in the capital structure of the investment," he said. The forum, which represents 375 institutional investors, loan-servicing companies, securities issuers and financial intermediaries, was central to drafting the rescue plan.
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