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State to refinance troubled mortgages

Plan calls for $250m fund and for lenders to accept some loss

Email|Print|Single Page| Text size + By Kimberly Blanton
Globe Staff / July 11, 2007

Massachusetts officials today are expected to unveil a $250 million fund to help delinquent borrowers of subprime mortgages refinance into more affordable loans to prevent them from losing their homes to foreclosure.

One of the first such efforts underway around the country, the Massachusetts plan has an unusual edge to it: State officials said they would use hardball negotiating tactics to force lenders to take a financial hit on the troubled mortgages the state will refinance.

The Patrick administration and the Massachusetts Housing Finance Agency, or MassHousing, reached agreement on the program yesterday. MassHousing will provide financing in conjunction with Fannie Mae, a federal agency that invests in mortgages.

Tina Brooks, Governor Deval L. Patrick's undersecretary of housing, said the refinancing fund is the largest piece yet of the administration's multipronged effort to deal with the rising number of foreclosures hitting Massachusetts homeowners.

The refinancing plan "is the big piece of the governor's program that we've all been waiting for," Brooks said.

The program will allow only those subprime mortgage borrowers who are 60 or fewer days behind on their monthly payments to refinance into 30-year loans at fixed rates of about 7.75 percent. The money should be enough to refinance loans for about 1,000 delinquent borrowers statewide.

Financial regulators blame the rise in foreclosure actions against Massachusetts homeowners on the proliferation of subprime mortgages used during the state's housing boom.

Such loans were targeted at people with less-than-stellar credit and typically offered low "teaser" interest rates that made them manageable in the first two years, but then spiked up to levels many homeowners could not afford.

Perhaps the most disputed element of the Massachusetts plan is state officials' insistence on forcing lenders to accept losses on loans when the value of the properties has dropped since the loans were first made, which is common in the current real estate downturn.

For example, if a subprime borrower purchased a home with a $250,000 mortgage and that property is now worth $230,000, MassHousing would offer $230,000 to the subprime borrower in a refinancing. The lender, to accept, would take a $20,000 loss.

Thomas Gleason, MassHousing's executive director, said lenders in such situations may have no choice but to accept the state's offer because, "that's the best deal they're going to get. Lenders understand if they go to foreclosure, that property will be worth dramatically less."

A spokesman for the trade group of Massachusetts mortgage lenders could not be reached to comment.

Some housing specialists questioned whether many lenders will agree to the state's tough terms.

Massachusetts' approach will "get the lenders to pay some share of the cost of the problems they created," said William Apgar, a senior scholar at Harvard University's Joint Center for Housing Studies. "Whether it works or not depends on whether the lenders have the authority to accept" losses on mortgages they've resold to Wall Street investors, he said.

The state of Ohio has initiated a similar refinancing effort with a $100 million fund. Such bailout programs have drawn criticism from some economists who contend such assistance efforts let overly aggressive lenders or overextended borrowers off the hook.

Massachusetts Secretary of State William F. Galvin said the program was "a step in the right direction, but it wasn't going to solve any major problems" because it can't help all the borrowers now in trouble -- those already in foreclosure. He's proposed legislation to require lenders to obtain court approval before they can foreclose on, and seize, a property.

The refinancing program has income limits: qualified borrowers in the Boston area can earn up to 135 percent of median household income, or up to $108,000. In the rest of the state, the income limit is 125 percent, or $98,000. MassHousing will refinance single homes up to $417,000 in value and three-family homes up to $645,300.

However, borrowers who used subprime mortgages as a refinancing tool to cash out equity from their homes would not be eligible for the assistance.

To apply for refinancing, borrowers must call NeighborhoodWorks America through a toll-free number (888-995-4673). NeighborhoodWorks will screen borrowers and pair up those who are eligible with a counselor.

Kimberly Blanton can be reached at blanton@globe.com.

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