Monday, December 3, 2007

Treasury Paulson December 3 2007

Our Treasury Secretary spoke today. His speech is here:

His speech is reproduced below in entirety, with my "contributions" inserted in red.

December 3, 2007HP-706
Remarks by Secretary Paulson on Actions Taken and Actions Needed in U.S. Mortgage Marketsat the Office of Thrift Supervision National Housing Forum, Washington, DC

Thank you, John. The Office of Thrift Supervision plays an important role in our financial system, and I appreciate your leadership at this agency. Thanks, also, for hosting this second national housing forum and providing a timely opportunity for me to give an update on the U.S. economy and mortgage markets. I mention timeliness because housing issues are affecting citizens all across the country, and because Congress returns to Washington today. In the final days of this congressional session, there is much that Congress can do to help America's homeowners. ("Hot Potato! Catch Congress!")

As we are all aware, the housing and mortgage markets are working through a period of turmoil, as are other credit markets, as risk is being reassessed and re-priced (at more reasonable and restrictive levels). We expect that this turbulence will take some time to work through, and we expect some penalty on our short-term economic growth. The positive news is that we are confronting and managing these challenges against the backdrop of a strong global economy(, we continue to hope). And the U.S. economy remains fundamentally sound – core inflation is contained, continued job gains are providing a good foundation for household spending, corporate balance sheets remain healthy overall (ignoring counterparty risk imbedded in corporate hedges), and strong growth abroad is supporting U.S. exports. Our economy will continue to grow, but it is facing a number of challenges.

And as I have said before, the housing market downturn is the biggest challenge to our economy. When home foreclosures spike, the damage is not limited only to those who lose their homes. (Of course, if it were so-limited, then I wouldn't have to be delighted to join you here today at [fill in blank] on behalf of Wall Street.) Homes in foreclosure can pose costs for whole neighborhoods, as crime goes up (in poorer communities,) and property values decline (in neighboring wealthy communities).

Avoiding preventable foreclosures, then, is in the interest of all homeowners.

Mortgage market financial innovation (i.e., the method of repackaging low-quality securities as "AAA" securities, and then dumping them on suckers) has benefited (the lucky and the inscrupulous, but less so) the U.S. economy and U.S. homeowners(, whatever the hell "owner" means in the context of forestalling foreclosures); it has also introduced some of the challenges we face today. Financial innovation led to the creation of mortgage products that put homeownership within the reach of more people (who should have remained renters). At the same time, (what I wish to ridiculously characterize as) innovation also made riskier loans - (and under appallingly stupid terms) with no down payments or minimal documentation - more widely available (so that mortgage brokers and securitizers and ratings-agencies could all collect commissions on volume). Similarly, securitization has brought benefits and challenges - making more capital available for mortgages, but creating greater market complexity. As a result, we now have an array of different market participants, often with different interests. (As a consequence of, err, "complex different market interests," err... I am offering today guidance on some non-market policy approach, about which I will soon be incredibly vague on details.)

Still, foreclosure is expensive for all participants - lenders and(, especially,) investors – and this expense is an incentive to avoid (ALERT! Imminent self-contradiction !) foreclosure when a homeowner has the financial wherewithal to own a home. An appropriate role for government is to bring the private sector together when innovation has greatly increased the complexity of achieving beneficial solutions for all parties involved(, because we are uncomfortable with a market that can produce both winners and losers). The number of subprime mortgage resets is going to increase dramatically next year (threatening many of my former colleagues' future bonuses), and we need to make sure the capacity is there to handle it.

And so, Treasury is aggressively pursuing a comprehensive plan to help as many able homeowners as possible keep their homes(, although by definition, an "able homeowner" should not need help). We began by convening a diverse group of market participants, who represent all segments of the mortgage industry (except for responsible young renters with cash who are its future). Based on what we have learned, we are implementing a three point plan to avoid preventable foreclosures and to minimize the impact of the housing downturn on the U.S. economy (and on GOP control of the White House).

First, we are increasing efforts to reach able homeowners who are struggling with their mortgages. (Let's talk!) Second, we are working to increase the availability of affordable mortgage solutions for these borrowers(, despite the fact that the "availability of affordable mortgage solutions" was what got us into this mess in the first place). Third, we are leading the industry to develop a systematic means of efficiently moving able homeowners into sustainable mortgages. (I will not comment this morning as to how these might amortize. Nor who might make up any financial difference between Policyworld and WhatWouldHaveBeenMarketworld.) This morning, I will provide more detail on the three elements of this plan, an update on the private sector's efforts, the government's efforts, and the additional steps that are needed in each area. (And away-y-y we go!!)

Increase Efforts to Reach Struggling Homeowners
First, we must reach homeowners who are struggling, reach them early, and reach them with information and hope (, and then, ballot slips, for better or worse). The need for this effort became starkly clear when we learned that 50 percent of foreclosures occur without borrowers ever talking to their lender or a mortgage counselor. (We're guessing that the 50% non-contactors overwhelmingly represents the Not-Primary-Residence population.) We knew that if we are to make a difference that number has to be reduced(, especially in Red States).

We learned that mortgage industry leaders had already stepped-up their efforts to reach delinquent borrowers, but many borrowers in trouble were afraid to speak to their lenders. Borrowers did respond more favorably to mortgage counselors, but the counselors didn't know which borrowers most needed assistance. Treasury and HUD helped bring these two groups together in the HOPE NOW alliance – a coalition of mortgage servicers, counselors and investors that are working to avoid preventable foreclosures and to improve the functioning of the mortgage markets.

Since its formation less than two months ago, the HOPE NOW alliance has made significant progress. In the past, some servicers may not have contacted borrowers until after their loans were delinquent. Today, all HOPE NOW servicers are contacting borrowers 120-days in advance of their mortgage reset(, although I'm not sure why my speechwriter just had me suggest HOPENOW servicers are contacting themselves), to reach them early, before their mortgage problem becomes overwhelming. For those troubled borrowers that servicers haven't been able to reach, HOPE NOW has launched a nationwide letter campaign (to the benefit, primarily, of the US Postal Service). These simple, one-page letters, on (instinctively discarded bulkmail) HOPE NOW letterhead, provide a toll-free hotline which homeowners can call to explore options with their servicer that may help them keep their home.

Mortgage investors (- admittedly, more "speculative" than "shrewd" -) recognize that foreclosure is costly and often not in their interest(,as well as a helluva lot more likely than they previously assumed). And they recognize that quality mortgage counseling can help prevent foreclosures. By bringing together counselors, servicers and investors, the HOPE NOW alliance has brought the resources of investors to bear to enable non-profit mortgage counselors to be more widely available. The Alliance is scaling up a national hotline that borrowers can call for mortgage counseling. And let me say to those listening out there – if you are worried about losing your home, call this number, 1-888-995-HOPE, to see if you are eligible for assistance. This hotline is available 24-hours a day to provide vital mortgage counseling in multiple languages. Nothing is worse than doing nothing. ("Call now, and we'll include this handsome toaster!")

The HOPE NOW effort to streamline refinancings and modifications is a positive step, but it is not a silver bullet (and the problem is not a werewolf.). There is no single solution to address all of the issues currently affecting the housing and mortgage markets.

The government has a role to play, as well. First, we need to draw attention to these letters and urge borrowers who receive them to act on them. Secretary Jackson and I have been doing just that, recently we sent copies of these letters to all Members of Congress (who qualify as "able homeowners") so they can alert their constituents. We are asking governors and mayors to do the same. We will also join HOPE NOW's efforts to broaden its public service announcement campaign, to spread the word that hope is but a phone call away. (Quiet plans are afoot behind the scene to make that "hope" redeemable for payment of mortgage principal. I'll announce that plan in Q1 2008.)

While increased industry funding is very important, (although not currently realistic given the collapse of the market for mortgage-backed securities,) we also need to do our part to support non-profit mortgage counseling organizations. For this public outreach campaign to be successful there must be enough trained mortgage counselors to answer the phone when homeowners call(, like when you call the I.R.S. the week before April 15th.). The Administration requested funding for NeighborWorks America and other non-profit mortgage counseling operations in its budget. But the appropriations bill has yet to be finalized; Congress needs to get it done quickly. ("Catch!")

Increase Availability of Affordable Mortgage Solutions
Of course, reaching homeowners is only part of the equation. The second part of our action plan is to make more mortgage products available for borrowers who have the financial wherewithal to own a home, but are struggling with the higher adjusted rate on their subprime mortgages. To help with this, the industry is looking at several innovative solutions – including both modifications and refinancings. State and local governments, especially in the hardest hit areas, are also developing solutions, including proposing funds that may help financially-able borrowers refinance out of expensive subprime loans. (I apologize for being short of any relevant details this morning.)

Given the local nature of housing markets, state and local solutions can be particularly effective. ("Catch!") Current law allows states and localities to issue tax-exempt bonds only to assist first time homebuyers or homebuyers in designated distressed areas. Some states' housing agencies have initiated pilot programs, backed by taxable bonds, to help refinance struggling subprime borrowers into more affordable mortgages.

Today, we are proposing to allow state and local governments to temporarily broaden their tax-exempt bond programs to include mortgage refinancings; if enacted, this will reduce the cost of innovative mortgage programs and allow these programs to reach more struggling homeowners. (How will the loans be refinanced? What will be the terms? How will changes be consitent with existing contractual obligtions? I'm not here this morning to offer any specifics.)

We in the federal government are also taking steps. This fall, HUD initiated "FHASecure" to give the FHA the flexibility to help more families stay in their homes, even (ALERT! Self-contradiction imminent!) those who have good credit but may not have made all of their mortgage payments on time. An estimated 240,000 families can avoid foreclosure by refinancing their mortgages under the FHASecure plan.

The Administration is taking action to help homeowners, and Congress must do the same before it leaves for the year. Since August, the President has been calling on Congress to pass his FHA modernization proposal which, by lowering the down payment requirement, increasing the loan limit and allowing risk-based pricing(, which are the exotic home loan characteristics that originally got us into this mess), will make affordable FHA loans more widely available (to people who can't afford a home). The Administration's proposed bill would help refinance another estimated 200,000 families into FHA-insured loans (and permanent indentured servitude).

Since August, the President has also called on Congress to provide tax relief for mortgage debt forgiven; homeowners who finally find relief shouldn't get put back in financial straits because of the tax code. Additionally, Congress needs to complete its work and create (areonautical pigs and) a strong, independent regulator for Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac have an important role to play in making mortgages available and affordable (to propogate moral hazard), and appropriate regulatory oversight is critical to their ability to serve their public policy purpose (now that the horse is four counties removed from the barn).

Develop a Systematic Solution for Transition into Affordable Mortgages
The third element of our plan involves a pragmatic response to the reality that the number of homeowners struggling with their resetting subprime mortgage will increase throughout 2008(, 2009, 2010, & 2011, but it's the immediate election year that's key). As volume increases (to 11), we will need an aggressive, systematic approach to fast-track able borrowers into a refinance or mortgage modification. This third element does not, and will not, include spending taxpayer money on funding or subsidies for industry participants or homeowners. (Instead, foregone tax-revenue will be covered by additional public debt issuance at the next generation's expense.)

While the reality is a bit more complex (since, the generation-after-next may also have to bear some of the cost), in the interest of simplicity, there are four categories of subprime borrowers. There are those who can afford their adjusted interest rate; these homeowners need no assistance (but are pissed off nonetheless by plummeting home values). There are also a substantial number of (utterly deadbeat) homeowners who haven't been making payments at the starter rate on their subprime loan and may not have the financial wherewithal to sustain home ownership; some of these homeowners (should have remained and) will become renters again. A third category of homeowners might choose to refinance their mortgage - putting them in a sustainable mortgage while keeping investors whole. This is the first, best option. Servicers should move quickly to assist those who can refinance.

And the fourth category is those with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate. We are focusing on this group, determining who they are and what steps may appropriately assist them (out of their contractual obligations).

However, given the diffuse nature of today's mortgage market, the steps toward refinancing and modification can be more difficult than it would seem(, you, see, because Wall Street chopped up garbage loans into discrete portions of financial stream & ownership, and distributed them to the four corners of Creditearth for an immediate fee).

The company collecting your mortgage payment every month is most often doing that on behalf of those who own(, where "own" possesses as much meaning as "owner" does when we talk of over-stretched home borrowers) the mortgage, and they are limited (by legal contracts we're not sure we can work around) in the decisions they can make on behalf of those ultimate owners, who are spread all over the world.

We are determined to bring this diverse group together, to develop a set of standards that will be implemented across the industry, from the largest mortgage servicers to the smaller specialty servicers. An industry-wide approach is critical to the effectiveness of this effort.
To speed up the modification process, Treasury is working through the HOPE NOW alliance with the American Securitization Forum to convene servicers and investors so they can develop categories of borrowers eligible for appropriate modifications and refinancings, and an industry-wide solution. This work takes time, as all parties seek (reminiscently) to define categories of (deadbeat) borrowers (as "AAA") for streamlined refinance and modification (and eventual assumption onto a public balance sheet) where that is in the best interest of both the borrower and the mortgage investor. I am confident they will finalize these standards soon (after the establishment of the $100 billion Super-SIV fund, which was my earlier policy fairytale to buy time). And I expect all servicers will implement them quickly, and create benchmarks (outside of Iraq) to measure their progress along the way. As a result, what was a fragmented, cumbersome process can be a coordinated effort which more quickly helps able homeowners (before next November).

(Repeat; summarize; exit stage right.)
Through continued, dedicated efforts by industry, non-profit organizations and the government, we can strike the necessary balance to mitigate the risk to our economy of the housing downturn. The issues are complex, and will take time. We are working aggressively and quickly, utilizing available tools and creating new ones, to help financially responsible but struggling homeowners. This, in turn, helps their neighbors, by preventing foreclosures and sales which can drive down property values and undermine the financial stability of families and communities; it also helps investors and lenders avoid unnecessary and costly foreclosures that are not in their interest.

We will continue these efforts, measuring progress and making adjustments when necessary, to ensure as many able homeowners as possible are reached and helped. The Administration and the private sector are taking action. Congress now needs to also act – to appropriate funds for mortgage counseling, to pass FHA modernization and GSE oversight legislation, to pass legislation to temporarily relieve tax liability for mortgage debt forgiven, and legislation to temporarily increase capacity and allow state and local governments new flexibility to use tax-exempt bonds for home mortgage refinancings. The U.S. economy and America's communities deserve no less (than the sort of market prescriptions insisted of other credit-extended countries by us through the IMF. And if you don't like that comparison, then the market prescriptions we lectured Japan about throughout the '90s after its malinvestment in real estate. I just don't have the guts or permission to say, "Recognize losses now!").

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