US Treasury Secretary Henry Paulson said he's moving "fast" in seeking a solution to the subprime crisis as securities industry lobbyists warned against any deal that weakens the US$7.1 trillion mortgage-bond market.
Paulson, who led a meeting of bankers and regulators last Thursday, is negotiating an agreement to fix interest rates on some troubled loans. He's seeking to stem a wave of foreclosures that threaten to drive the US economy into recession next year.
top risk
"The No. 1 risk of across-the-board loan modification is losing investor confidence in mortgage backed-securities markets," Tom Deutsch, deputy executive director of the American Securitization Forum, said in an interview in Los Angeles on Friday.
"If they no longer invest in mortgage-backed securities, you cut off the credit available for refinancing, you cut off the lifeblood of being able to give better loans," he said.
The comments suggest some differences between investors and regulators over how long lenders should freeze rates and what conditions must be met before a borrower qualifies for relief. An accord may come as soon as next week, said a person familiar with the talks. Paulson addresses a housing conference tomorrow.
The forum, whose members include Goldman Sachs Group Inc and Citigroup Inc, was represented at the meeting with Paulson. The group lobbies for investors, traders, underwriters, accounting firms, ratings firms and other institutions involved in the creation and sale of mortgage-backed securities.
"The investors are the people who are ultimately going to either lose money because the loan doesn't get paid or because a lesser amount gets paid on the loan," said Oliver Ireland, a partner at Morrison & Foerster LLP in Washington and a former associate general counsel at the US Federal Reserve.
"The challenge here is to make sure that somehow you create workouts that the ultimate investors can agree to," he said.
loan defaults
Adjustable-rate subprime loans were typically sold with low rates for the first two or three years and then reset at a higher rate for the duration, usually another 28 years. Defaults on the loans, some of which were the product of what Fed officials called "lax" lending standards, climbed to a record this year.
That's likely to worsen as more than 1.5 million nonprime mortgages valued at US$331 billion will reset by the end of next year, the Federal Deposit Insurance Corp said.
"We're moving as fast as we can move," Paulson told ABC News in an interview posted on its Web site. "We believe that the biggest issue is gonna be beginning next year when the number of resets is going to be increasing dramatically."
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