Mudd: Innovation Needed to Rescue B&C Borrowers.

Washington -- Some blame creative financing for putting so many borrowers on the brink of foreclosure, but one of the industry's top executives thinks innovation also is key to solving the problem.

Speaking at an American Enterprise Institute conference last month,

Fannie Mae CEO Daniel Mudd called for strategies aimed at helping borrowers who face onerous rate resets to refinance into "innovative, high quality" fixed-rate mortgage products.

He said the industry will have to stretch its capabilities to "keep foreclosure from becoming a malignancy on communities and the economy."

Mr. Mudd believes innovative fixed-rate products could replace "a lot of the sloppy products" that have already been eliminated from the market in the wake of the subprime meltdown. Mr. Mudd noted that one commentator has called the plethora of nonprime products that have fallen out of favor "high school science projects masquerading as mortgages."

Among the possibilities, Mr. Mudd said the industry might want to embrace equity-participating mortgages, in which both the borrower and lender share in home-equity gains, as one way to save troubled homeowners.

He also said depository lenders could benefit from incentives to make Mortgage Reinvestment Act home loans, whereby the banks would get credit similar to the credit they receive for making Community Reinvestment Act loans for developing strategies to help borrowers avert foreclosure.