Wednesday, February 27, 2008

Treasury Secretary to Wall Street: fend for yourself.

The Wall Street Journal

February 28, 2008


Paulson Dismisses
Mortgage Rescue Plans

Bernanke Keeps Door
Open to Rate Cuts
To Boost Economy
February 28, 2008; Page A1

WASHINGTON -- The Bush administration is hardening its opposition to the chorus of Democrats, bankers, economists and consumer advocates calling for a big-money government rescue program for struggling homeowners.

[Henry Paulson]

In an interview yesterday, Treasury Secretary Henry Paulson branded many of the aid proposals circulating in Washington as "bailouts" for reckless lenders, investors and speculators, rather than measures that would provide meaningful relief to deserving, but cash-strapped, mortgage borrowers.

Mr. Paulson's comments came amid signs that the nation's housing market is getting worse, not better. Indeed, at a House hearing yesterday, Federal Reserve Chairman Ben Bernanke kept the door open to further interest-rate cuts to boost the economy, even as he warned that inflation pressures have intensified in recent weeks.

President Bush and other administration officials have voiced skepticism before about a major government effort to ease the burden of the nation's housing slump. But Mr. Paulson's comments are the most explicit to date in laying out the administration's opposition to the recent spate of rescue plans.

Mr. Paulson, citing estimates that as many as two million Americans could lose their homes to foreclosure this year, predicted that the administration's market-based approach will be enough to keep the situation under control. Its centerpiece is a plan that encourages the mortgage industry to voluntarily ease up on certain borrowers.

"I don't think I've seen any scenario where the American taxpayer needs to be stepping in with more taxpayer dollars," Mr. Paulson told The Wall Street Journal.

Mr. Paulson's stance highlights the rifts appearing in the bipartisan cooperation that led to the passage of a $152 billion economic-stimulus package by Congress earlier this year. Both the Bush administration and the Democrats who control Congress now appear to be staking out increasingly rigid positions.

Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee and typically an ally of Mr. Paulson's, said that, until now, he had supported the Treasury's steps to address mortgage delinquencies and the credit crunch they have spawned. "But they're not helping enough people," Mr. Frank said yesterday. "We're not going to get out of the crunch until we stop this cascade of foreclosures."

The Fed's Mr. Bernanke appeared to take a slightly more flexible position than Mr. Paulson, telling a congressional committee yesterday that the turmoil in the housing market doesn't yet merit large amounts of public money. "I don't think we're at that point, but I do think it's worthwhile to keep thinking about those issues," Mr. Bernanke said.

Despite a generally downbeat outlook on the economy, Mr. Bernanke suggested some of the pessimism on the housing front might be overdone. Home-price declines are partly self-correcting, he said; as prices decline, more buyers will be tempted to jump into the market. He predicted home prices would hit bottom some time next year.

There's a growing sense in Washington that the federal government, either during this administration or the next, may feel compelled to mount a more aggressive, expensive response to mortgage defaults, which have destabilized financial markets and threatened to mire the broader economy in recession.

Running Out of Ideas

Administration officials "have been willing to broker deals, but they haven't been willing to put taxpayer money on the line," said Mark Zandi, chief economist at Moody's, a West Chester, Pa., consulting firm. "I think they're trying to stick to those principles, and now they're running out of ideas that are consistent with those principles."

Both Democratic presidential hopefuls have criticized President Bush, saying he exacerbated the housing market's woes by tolerating overly aggressive lending practices. Sen. Barack Obama (D., Ill.) has advocated the creation of a $10 billion fund to help borrowers avoid foreclosure or buy first homes, while Sen. Hillary Clinton (D., N.Y.) has proposed a 90-day moratorium on foreclosures and a five-year interest-rate freeze on adjustable-rate mortgages.

Several major banks, including Credit Suisse Group, have floated plans that would expand an existing federal program run by the Federal Housing Administration to extend government insurance to thousands of troubled loans. Former Fed Vice Chairman Alan Blinder has proposed reviving a Depression-era agency to buy up troubled mortgages and refinance them at affordable rates.

Even the Office of Thrift Supervision, an independent agency within Treasury, is developing a plan that would make it easier for banks and thrifts to refinance loans for homeowners whose houses are worth less than the amount they owe.

Rep. Frank's plan would provide about $10 billion in loans and grants to help states buy foreclosed homes, plus a similar sum to allow the FHA to guarantee new, more-affordable mortgages for homeowners on the brink of losing their houses. Democratic lawmakers, including Senate Majority Leader Harry Reid of Nevada and Sen. Chris Dodd of Connecticut, chairman of the Banking Committee, have legislative remedies in mind, as well.


"I'm seeing a series of ideas suggested involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes," Mr. Paulson said. "Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street."

The secretary added one caveat: "It would be imprudent not to have contingency plans, but we are so far away from seeing something that would have me calling for a bailout that I don't see it."

Mr. Bush is threatening to veto a Senate bill that includes $4 billion to help states and localities redevelop abandoned and foreclosed houses. "I believe the evidence is clear that these [voluntary industry] initiatives alone will not steer enough families away from foreclosure or our country away from further economic weakening," Mr. Reid wrote in a letter to the president yesterday, referring to the main element of the White House-backed industry plan. "In my view, the enormity of the foreclosure crisis requires a much more aggressive response."

The Reid bill also includes a provision -- opposed by many Republicans and the White House -- that would allow bankruptcy judges to alter the terms of mortgages.

Mr. Paulson, a former chief executive of Goldman Sachs Group, repeated his view that the U.S. economy is fundamentally on sound footing and would dodge a recession. Still, he warned again yesterday that the chances of worse-than-expected economic growth are greater than the chances of an upside surprise.

In his congressional testimony, Mr. Bernanke indicated that the Fed is inclined to lower interest rates to support the economy.

"The further increases in the prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggest slightly greater" risk that inflation will be higher this year than officials expected last month, Mr. Bernanke said in the first of two days of testimony to Congress.

Market Expectations

Nonetheless, he showed more concern that the economy will grow more slowly than the already-sluggish performance envisioned a month ago, due to the possibility that housing, the job market or credit conditions may deteriorate more than expected. The Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Mr. Bernanke said.

His comments cemented market expectations that the Fed will lower its short-term interest-rate target to 2.5% from the current 3% at its next meeting, March 18.

A particular risk Mr. Bernanke highlighted in response to questions from lawmakers was that the Fed's 2.25 percentage points of interest-rate cuts since September aren't being fully passed through to consumers and businesses because banks, other lenders and the capital markets have become more reluctant to lend.

A major reason for their reluctance is that losses related to subprime mortgages and other risky loans have depleted the capital of many banks and other major financial intermediaries, such as government-sponsored mortgage giants Fannie Mae and Freddie Mac. Mr. Bernanke called on such institutions to raise additional capital so that they could resume normal lending activity.

Mr. Paulson cited estimates that 1.5 million homeowners lost their houses to foreclosure last year and that the toll could reach two million this year. During normal economic times, there are some 650,000 foreclosures a year in the U.S.

In the coming days, a mortgage-industry alliance called Hope Now is expected to report on its efforts, backed by the administration, to expedite refinancing or rate freezes for as many as 1.2 million subprime borrowers whose adjustable interest rates are due to rise in the next two years. Mr. Paulson said he planned to keep the pressure on mortgage servicers to cut a deal with homeowners who are current on their payments but might slip into delinquency if their rates jump up.

He also said he would press the industry to expand the program to reach borrowers struggling with prime-rate and other mortgages.

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