Lenders vow loans to limit foreclosures

The heads of Fannie Mae and Freddie Mac said Tuesday that they were developing new types of loans to help borrowers with high-risk mortgages keep their homes at a time of rising foreclosures.

A key federal regulator also urged lenders to step in now and extend flexible terms to struggling homeowners.

The moves by Fannie Mae and Freddie Mac, the biggest buyers and guarantors of home mortgages in the country, came in response to the turmoil in the market for so-called sub-prime mortgages, higher-priced loans for people with tarnished credit or low incomes who are considered greater risks. In recent weeks, the distress has roiled financial markets and stoked anxiety that it could spill over into the broader economy.

The companies’ initiatives were disclosed by their chief executives at a hearing held by the House Financial Services Committee.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., exhorted mortgage lenders to show flexibility toward borrowers to help stem a flood of defaults among homeowners with sub-prime loans.

Many of those borrowers “could avoid foreclosure if they were offered [loans] that allow for affordable mortgage payments,” Bair testified. Restructuring their expensive adjustable-rate mortgages “into more affordable products, especially 30-year fixed-rate mortgages, would bring them back to good standing, allow them to repair their credit histories and dampen the impact that foreclosures may have on the broader housing market.”

Most important, Bair added, “people would be able to stay in their homes.”

Adjustable-rate mortgages are especially prevalent in the sub-prime market. They are considered higher-risk loans because they typically draw borrowers in with an initially low “teaser” interest rate but can then adjust to a sharply higher rate after a few years.

A homeowner who takes out a $200,000 adjustable mortgage with a teaser rate of 4%, for example, initially pays about $955 monthly in principal and interest.

But when the interest rate jumps to 7%, say, in the second year of the mortgage, the homeowner’s payments rise to $1,321 a month. Regulators call such a big change “payment shock.”