BILL CALDERARA – ‘A broad stroke’

Talk of a mortgage rate freeze is giving some community banks the chills.

“This [mortgage crisis] is not a community bank problem,” said Bill Calderara, executive vice president of Fairfield County Bank. “Community banks did not play a role in it. And yet everybody’s being lumped into this same scenario in dealing with the issues. This is basically an investment bank and a money center bank issue.”

But whether such a rate freeze is done voluntarily, mandated by federal regulation or even happens at all remains to be seen.

Calderara’s concern is that the freeze – designed to help homeowners with adjustable-rate mortgages by postponing the date when the rate would reset higher – will come about through regulation.

When adjustable-rate mortgages have been securitized and spread over multiple investment pools, “there is no one owner of the asset anymore,” he said. “So in order for the servicer, or whoever is dealing directly with the consumer now, to be able to negotiate some payment plan that [borrowers] can afford, they don’t have the authority to do it because they’re not the owner. And you can’t get a conglomeration of the owners together to say, ‘Yes, we all agree to this.’ So [federal authorities] are going to try to solve that with regulation.

“Unfortunately, when you get regulation, you don’t go through [a process] where everybody looks at every possible consequence. You get a broad stroke.”

Community banks, which typically hold their loans, already are working with their customers when problems develop with their mortgages, Calderara added.

But Connecticut Department of Banking Commissioner Howard F. Pitkin said that state-chartered banks have little exposure to the loans being considered for the rate freeze, and that the rate freeze could help ease some of the turmoil in the mortgage market.

“[State-chartered banks’] interest is very limited,” he said, “although they are interested in anything that cuts down on foreclosures and stabilizes the environment. This, above all, would do that.”

Pitkin added, “Either voluntarily or not, the same results are going to occur. And it will be a more stable environment for however long they do it. It’s not going to be forever; it’s going to be for a period of time.”

‘A Fair-Rate Offer’

Observers have said freeze proposals of three to five or five to seven years have been considered. Insiders also have suggested that the percentage of adjustable-rate mortgage holders that actually would benefit from such a freeze is relatively small.

To reach as many troubled borrowers as possible, Pitkin said a broad effort is needed.

“Any approach that’s going to work has got to come from state, local and federal government, in addition to the private sector,” the commissioner noted.

For example, on Dec. 10, the Connecticut Housing Finance Authority will begin taking applications for the $50 million CT Families Refinancing program, which is designed to assist low- and moderate-income borrowers who took out a subprime loan to purchase their first home by refinancing them into 30-year, fixed-rate loans.

“I expect to see about 400 families that are helped,” Pitkin said.

On Monday, the U.S. Treasury proposed allowing states to use more types of tax-exempt bonds as a way to help borrowers headed for trouble.

“Current law allows states and localities to issue tax-exempt bonds only to assist first-time homebuyers or homebuyers in designated distressed areas,” Secretary of the Treasury Henry Paulson Jr. said in a prepared statement. “Some states’ housing agencies have initiated pilot programs, backed by taxable bonds, to help refinance struggling subprime borrowers into more affordable mortgages. Today, we are proposing to allow state and local governments to temporarily broaden their tax-exempt bond programs to include mortgage refinancings; if enacted, this will reduce the cost of innovative mortgage programs and allow these programs to reach more struggling homeowners.”

The efforts to reach out to struggling borrowers, however, are not what concern Calderara.

“I understand and support the need to help and protect consumers in this situation,” Calderara said. “My concern is that they’ll set up the [rate-freeze] standards in such a way that we will get affected, even though we didn’t play in the arena.”

That action could have the effect of community banks not realizing the revenue on adjustable mortgages due to reset at a higher rate, he said.

“[These loans] weren’t underwritten improperly,” Calderara noted. “They weren’t deeply discounted. These weren’t the option ARMs where they had a payment rate of 1 percent but the underlying interest rate is accruing at 8 percent, and now the customer is going to get hit with those payments. They’re just normal, everyday adjustable-rate products that have been in the marketplace for years.

“These aren’t hardship cases. This was a fair-rate offer to a consumer that qualified for that loan. Should that market segment get a windfall of keeping a much lower interest rate or being frozen at that original rate for a longer period of time? Probably not.”