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Rate-Freeze Talk Lifts Lenders

Countrywide, Wells Fargo soar on reported plans to suspend variable interest rate resets.

Shares of the big mortgage lenders surged on Friday on news that regulators and industry executives were meeting to flesh out a plan to temporarily freeze interest rate resets on certain subprime adjustable-rate mortgage loans.

Regulators and executives from


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Wells Fargo

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Washington Mutual

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Countrywide Financial


, among others, were close to agreeing on a plan that would extend the teaser rates on subprime mortgages that promoted low interest rates for the first two to three years, but then reset to much higher fixed rates for the majority of the life of the loan,

The Wall Street Journal


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The plan could be announced as early as next week, the



Shares of Countrywide surged as much as 29%, while Wells Fargo rose 11% and Washington Mutual soared around 17% on Friday morning.

Subprime mortgage borrowers -- those who have shaky credit histories or obtained a loan with little or no documentation -- began having problems this year as home prices began falling and the availability of credit tightened.

Borrowers have been increasingly defaulting on their mortgage payments this year, as the resets begin, because the higher rates typically increase mortgage payments by several hundred dollars a month, leaving many borrowers overextended. Foreclosures have also been rising as borrowers are unable to refinance the loans to lower interest rates.

"The plan being floated by Treasury to temporarily freeze subprime mortgage rate resets makes compelling sense, in our opinion," Howard Shapiro, an analyst at Fox-Pitt, Kelton, writes in a note. "It is a necessary step to stabilize reeling mortgage markets and avoid a further downturn, as servicers struggle to cope with a cascade of current and potential foreclosures."

Still, at least one analyst is skeptical of a government-backed plan.

"At a time when many are claiming that there is a credit crisis, the government has come up with yet another idea to drive funds away from the markets," writes Richard Bove, an analyst at Punk Ziegel.

"The concept of forcing banks to keep bad loans on their books violates every precept of regulation in American banking," he writes. "Bad loans must be taken off the books to allow good loans to be made. Forcing banks to keep bad, low-return loans on the books is something that the banking regulators have never done."

Countrywide, Washington Mutual and Wells Fargo have had their fair share of troubles as the mortgage crisis deepened.

Wells Fargo said this week that it will take a fourth-quarter provision of $1.4 billion for its most troubling home equity loans. The San Francisco bank is also establishing a special fund to cover losses expected in about $12 billion worth of home-equity loans either purchased or originated through indirect channels, such as wholesale mortgage lending platforms and the correspondent channel.

The provision announcement comes just two weeks after CEO John Stumpf said the U.S. housing slump is the worst since the Great Depression and that problems will persist through 2008.

Washington Mutual also recently painted a bleak picture for the housing market and itself.

WaMu's provisions for future loan losses in the fourth quarter will be "similar to or slightly higher than" the $1.1 billion to $1.3 billion range the company had given for the fourth quarter, executives said at an investor conference earlier this month.

Calabasas, Calif.-based Countrywide, however, has been the hardest hit among the big mortgage lenders. Its stock has lost around two-thirds of its value this year due to falling home prices and rising delinquencies and defaults. The company has been struggling to find funding to originate mortgage loans as the credit crunch intensifies.

Shapiro upgraded Countrywide's stock to the equivalent of a buy on the news. He singled out Countrywide because it is the nation's largest independent lender.

"We believe this is good news for our sector as a whole, but believe that

Countrywide will be the prime beneficiary as the nation's largest servicer and top originator," he wrote. "Investors should buy aggressively in advance of an announcement and see significant upside through 2009, as the mortgage market begins to normalize."

Countrywide faced a liquidity crisis so large that many investors feared the company would go under as the markets for mortgage-backed securities essentially froze up in the summer.

Last week analysts feared once again that the company could go bankrupt after

Freddie Mac


reported a $2 billion net loss for the third quarter. The government-sponsored agency attributed the loss to increased money it needed to set aside for credit losses, as well as a markdown in the value of its assets. Earlier in the month,

Fannie Mae


also reported losses.

The news is troublesome because Fannie and Freddie, known as government-sponsored entities, or GSEs, are some of the largest purchasers of residential mortgage loans. The need for the GSEs to purchase mortgage loans is especially important these days, as the market for mortgage-backed securities remains for the most part frozen.

Countrywide said in a statement last week that as of Oct. 31 it had $35.4 billion worth of "highly reliable liquidity," up from $33.6 billion in September. Countrywide Bank also has enough liquidity available "to meet its projecting operating and growth needs" and has significant contingent liquidity to meet evolving market conditions, it said.

As if the news couldn't get any worse for Countrywide, early this week U.S. Sen. Charles Schumer (D., N.Y.) called for a federal probe of the advances the lender received from the Federal Home Loan Bank of Atlanta. In a letter, Schumer said the poor quality of loans Countrywide put up as collateral "may pose a risk to the safety and soundness of the FHLB system as a whole."

Countrywide said at an investor conference in New York this week that it is in "full compliance" with the collateral requirements of the Federal Home Loan Bank of Atlanta. The bank also defended its processes in a letter to members the next day.