Equity investors cheered news that the US Treasury Department is working on a plan with mortgage industry leaders to save struggling homeowners from foreclosure, but analysts said it will not completely save banks from home loan pain.
Shares of a major bank index, the Philadelphia KBW Bank Index, rose 3.1 percent on Friday, after sources said the Treasury and lenders are putting the final touches on the plan and could announce details as soon as Wednesday. The move signals the government is paying attention to difficulty in the housing and mortgage market, where foreclosures are surging and home prices are dropping.
"There's a growing feeling that Washington is not asleep at the switch," said Ray Soifer, chairman of Soifer Consulting, which consults the banking industry. At issue are many subprime loans that feature low initial "teaser" rates for borrowers, but reset to much higher rates after two or three years. The Treasury's plan involves freezing borrowers' interest rates before they reset higher.
But many analysts note that renegotiating terms for loans will just postpone the inevitable - writing them off. A few extra quarters of payments is a positive, but in the end, the loans must be written down because they will not earn the expected return.
"If you're a bank and you made a loan at a teaser rate because you wanted a higher rate longer-term, you're not going to get it now," said Robert Albertson, chief strategist at Sandler O'Neill & Partners in New York.
The Treasury's hope is likely that banks can forestall writing down too many mortgage-related assets, while economic growth in other sectors accelerates, allowing banks to generate higher profits and rebuild capital, analysts said.
If borrowers' income increases, they may be better equipped to cope with the rising interest rates, said Mark Batty, financial services analyst at PNC Wealth Management in Philadelphia.
Wells Fargo & Co shares rose nearly 7 percent to $32.43 and the shares of Countrywide Financial Corp rose 16.3 percent to close $10.82 on Friday. Both are among the banks reportedly talking to the Treasury.
To some investors, these scenarios are too optimistic. "If you postpone the inevitable, you'll just draw out the pain for a longer period of time," said Nandu Narayanan, a portfolio manager at hedge fund Trident Investment Management.
"If there's uncertainty about what banks have left on their books, they'll have more difficulty raising capital, which might hamper their ability to continue to grow their business and fund growth in other parts of the economy,"
It is not clear if banks will sign onto the proposal in it is current form, added Mike Holland, founder of Holland & Co, which oversees more than $4 billion of assets.
"We'll have a lot of proposals before we have the right one," he said. A system similar to the Resolution Trust Corp, which bailed out savings & loan banks in the 1980s by buying up their assets and reselling them, may make more sense than trying to renegotiate large numbers of mortgage contracts, Sandler O'Neill's Albertson said.
"That model, painful as it was, kept things moving," he added. But most analysts agreed the Treasury has to do something. "It's better than standing by and doing nothing," said PNC's Batty, who generally supports the current Treasury plan.