HOUSING DECLINE STILL UNFOLDING - U.S. Treasury Secretary sees it as most significant current risk to economy
16 October 2007
Treasury Secretary Henry M. Paulson, Jr. in Georgetown today urged Congress not to overact with excessively harsh measures.
U.S. Treasury Secretary Henry M. Paulson, Jr., offered a pessimistic view of the country’s housing slump Tuesday as he called for help for hard-pressed homeowners and new mortgage regulations.
But he urged Congress not to overreact by passing excessively harsh measures.
“Let me be clear: Despite strong economic fundamentals, the housing decline is still unfolding, and I view it as the most significant current risk to our economy,” Paulson said in a speech at a Georgetown University law forum. “The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth.”
Paulson said that “a first and important step” is to identify struggling borrowers early, steer them to mortgage counselors “and find a sustainable mortgage solution.”
“We have an immediate need to see more loan modifications and refinancing and other flexibility,” said Paulson. “For many families, this will be the only viable solution.”
Citing recent surveys showing that as many as half of the borrowers who have gone into foreclosure never had prior discussions with mortgage counselors, Paulson said, “That must change; early intervention is critical.”
He warned against what he sees as an overreaction to “predatory lending” practices, and he said Congress must proceed with caution in determining whether to impose greater liability on mortgage “securitizers and investors,” or risk “cutting off investment inflows to the housing market.”
Paulson’s remarks Tuesday reflected perhaps the most sobering assessment by an administration official of the housing industry. Two months ago, when credit markets around the world were freezing up in panic over failed mortgages, Paulson said he was confident investors would work things out for themselves.
“We’re going to work through this problem just fine,” he said in an interview with CNBC on Aug. 21. “I think what the American people need to understand, these things take a while to play out.”
Paulson says he still holds that view but, in a sign that administration officials are more worried about underlying problems in the markets than they had previously let on, Paulson and other top Treasury officials are prodding and pushing Wall Street firms and the mortgage industry to come up with solutions - and helping devise some of them as well.
The plan announced Monday involves no money from taxpayers, and it was negotiated primarily between the banks themselves, but it highlighted Paulson’s growing effort to marry two competing goals of the Bush administration: to stabilize the battered markets for mortgages and housing, but to avoid a government bailout that might encourage investors to take even bigger risks in the future - what economists call “moral hazard.”
“I have no interest in bailing out lenders or property speculators,” Paulson said Tuesday. “Still, we must recognize the very real harm to families affected by the housing downturn.”
The Treasury’s move coincided with a gloomy assessment of both the mortgage and housing markets by Ben S. Bernanke, chairman of the Federal Reserve. “Despite a few encouraging signs, conditions in mortgage markets remain difficult,” Bernanke told the New York Economic Club in a speech in Midtown Manhattan Monday evening.
Bernanke said the overall economy is still growing, suggesting that the Fed is not likely to cut interest rates at its policy meeting at the end of this month unless conditions worsen markedly in the next couple of weeks, but he predicted that the housing market has yet to hit bottom and that it was likely to be a “significant drag” on growth through early next year. A weak economy, he added, could reinforce problems in the credit markets.
Paulson’s effort to hammer out a plan with major banks to support mortgage-backed securities was headed by two of his top deputies, Robert Steel and Anthony Ryan, both Wall Street veterans. The two men herded rival bank executives into meetings and conference calls over the past month, and helped devise a plan aimed at jump-starting the frozen mortgage market.
Paulson is becoming more active on other fronts as well. In his speech Tuesday, he called for new nationwide rules for mortgage lenders, changes in the practices of credit-rating agencies and tougher scrutiny by federal banking regulators.
Paulson also tried to step up pressure on mortgage lenders and mortgage-servicing companies to renegotiate terms for people in danger of defaulting on expensive subprime loans.
“We have an immediate need to see results,” said Paulson. “The current process is not working well. This is not about finger-pointing, it is about putting an aggressive plan together and moving forward.”
In an interview on Monday, Paulson said the credit markets appeared to be slowly recovering from the panic of early August. But he sounded more worried than before about the wave of families that may face foreclosure as initial teaser rates expire on their subprime mortgages.
“I’m increasingly concerned there are some homeowners out there being harmed by the complexity of the system,” he said. “I want to see more results. I don’t want to see foreclosures taking place where 50 percent of the people haven’t talked to anybody.”
All of this entails a delicate balancing act between two very different goals. On the one hand, administration officials want to avert a crisis of confidence in financial markets and reduce an expected torrent of foreclosures among people whose loans are set to jump to much higher interest rates over the next year or so.
On the other hand, the Bush administration remains staunchly opposed to government intervention in financial markets and doubtful about imposing restrictions that might be aimed at protecting home buyers but could restrict the kinds of mortgage loans companies can offer.
Indeed, the bank deal announced on Monday suggests a cautious form of government pressure that often comes closer to jawboning and moral persuasion than to orchestrating bailouts or issuing edicts.
“This was developed by banks and by investors,” said one senior administration official, who spoke on condition that he not be identified. “The secretary identified this as an area of the marketplace that was improving a little less slowly.”
Treasury officials and at least some of the major banks had differing reasons for wanting to reach the same goal. The banks were worried about being caught with tens of billions of dollars worth of mortgage-backed securities they might not be able to sell except at fire-sale prices worth only a small fraction of their face value.
Treasury officials, meanwhile, wanted to restore confidence in the market for mortgage-backed securities. They were worried that continued fear and paralysis in that area would aggravate the downturn in housing and damage the broader economy.
Paulson initiated a meeting in Washington with top executives from Citigroup and other major banks on Sept. 16, according to administration officials. At the time, the immediate distress in credit markets, which erupted in early August, had begun to ebb slightly. But Treasury officials saw continued problems for asset-backed commercial paper, the short-term securities that financial institutions had been issuing to pay for big bundles of mortgage loans.
In calling together executives from top banks, Paulson said he was looking for ways to revive investor confidence in mortgage-backed securities that seemed to be fundamentally healthy and quite different from those backed by subprime mortgages and “no document” loans that require little or no verification of a borrower’s income.
The idea of the new pool is to fill it only with securities that have top credit ratings and have been scrutinized by a committee that includes potential buyers of those securities. The hope is that the new fund will be good enough to revive interest and rekindle the market for other mortgages.
Both Paulson and Bernanke, the Fed chairman, expressed their frustration with the complex mortgage securities that are inscrutable to many investors.
“I’d like to know what those damn things are worth,” Bernanke said in response to a question after his speech. Until investors “are confident in their evaluations,” he added, “they are not going to be willing to fund these vehicles.”
And though he is not specific about his plans, Paulson plans to put more pressure on mortgage servicing companies to negotiate new terms with subprime borrowers whose monthly payments are set to jump sharply over the next year. “You’re going to see us quite active there,” he said, “working with the private sector for an integrated approach.”
See Related: BUSINESS
See Related: WORLD POLITICS
THE INSIDER JOURNAL REACHING THOSE WHO MAKE THINGS HAPPEN IN STAGE, FILM, FINE ARTS, POLITICS AND GOVERNANCE
CREATE YOUR ADVERTISEMENT NOW
See Related: SAN FRANCISCO SENTINEL TEAM MEMBERS ACKNOWLEDGED AS EXPERT IN THEIR FIELD
2 Responses to “HOUSING DECLINE STILL UNFOLDING - U.S. Treasury Secretary sees it as most significant current risk to economy”
October 16th, 2007 at 9:32 PM
I applaud Secretary Paulson. I believe that everyone is missing a very important point. The key to a solution to this crisis is the same as the cause of the poor credit ratings of these subprime borrowers. They all lack an understanding of their credit and spending habits. Loan modifications or refinancing options will not help these borrowers to stay current on their loans. They need a specific financial literacy program that deals directly with enabling them to better understand how to improve their spending patterns. The challenge is how to reach the millions at risk in the shortest possible time. I suggest a web-based Financial Literacy program that deals specifically with these borrower’s ability to avoid default and foreclosure.
October 18th, 2007 at 5:52 PM
[...] Luckily, Hank the Snake Paulson does his best to clarify this point: The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth [...]