Mortgage bill a win for banks

NEW YORK — Congress' plan to allow people to refinance into more affordable mortgages won't just relieve thousands of homeowners — it's also expected to save the banks that issued the loans billions of dollars.

Most banks will lose much less money handing mortgages over to the government than they would if the loans defaulted and the homes went into foreclosure. Plus, it will be up to the bank to decide whether to allow the homeowner to refinance.

"The banks should be thrilled with this," said John Vogel, real-estate professor at Dartmouth College's Tuck School of Business. "The banks have been pushing it; this is as good a deal as they were going to get."

The legislation, which the Senate approved during a rare Saturday session and which President Bush is expected to sign into law, is forecast to affect at least 400,000 homeowners.

It comes after several months of discussions between lawmakers and lenders. Banks including Credit Suisse and Bank of America submitted proposals.

Banks and other mortgage holders will likely save some $16 billion if they let homeowners refinance into mortgages issued by the Federal Housing Administration (FHA), estimated Ladenburg Thalmann analyst Richard Bove.

That's assuming banks will lose roughly $25,000 per homeowner by selling their mortgages to the FHA, and that they would eventually lose an average $64,000 per homeowner by allowing homes to foreclose.

"I don't think it helps the banks in the near term, but I think it's an enormous boost in the long term," Bove said.

It's unclear the extent to which banks and investors that issued and bought risky mortgages will offer the FHA refinancing option. Bob Davis, executive vice president of The American Bankers Association, said he expects the majority of the loans sold to the FHA to come from securitized pools of resold and repackaged mortgages.

Citigroup, for one, said it expects to participate in the refinance program, but that "once the final regulations are available from the agencies, we will be better positioned to evaluate the scope of our participation," a spokesman said in a statement.

Wachovia and Seattle-based Washington Mutual also expressed support.

A Wachovia spokeswoman said the bank "agrees that enactment of this legislation will help to stabilize and strengthen the housing finance system," and a WaMu spokeswoman said it believes "this legislation will provide additional tools and expanded options for borrowers and lenders in addressing troubled loans."

The government's decision to set aside $4 billion for communities slammed by foreclosures should also help to stabilize tumbling home prices, experts say.

The plans, however, are not viewed as an ultimate panacea to the housing and financial crises. First of all, if banks and mortgage servicers decide they don't want to allow their borrowers to get FHA loans, they don't have to.

The reason for that is it allows banks to be more flexible, said Davis. If a bank wants to keep its customers, it can let them refinance as an alternative to turning the mortgages over to the FHA.

But the rule could also mean that banks, hoping to avoid immediate losses, won't offer relief to as many homeowners as the government intends to, said Vogel, adding the 400,000 figure "might be optimistic."

And if homeowners don't think their banks will allow them to refinance into FHA loans, they might still decide to send in their keys and walk away from their loans, Vogel said.

Another point of contention is the idea that taxpayers are paying for the risks other people took.

In the legislation, there is little specificity about "bailing out institutions because of where they were located and what markets they were hit by, rather than those that took big risks," said Brad Neigel, a senior analyst at financial-services research firm Aite Group.

Meanwhile, it is unlikely that permitting struggling homeowners to refinance will stanch the growing number of bank failures.

Institutions sitting on enough capital should be able to take the initial hits from selling off their mortgages at a loss and eventually come out ahead, Neigel said.

But, he added, "The ones that are really struggling, that are really undercapitalized, will fail. They're not going to be able to take losses."

And there's no guarantee that a refinanced loan will not eventually become a foreclosure for the FHA, Neigel said. "You wonder, are we just putting a Band-Aid on a bigger problem that isn't being addressed?"