Our President presented today the administration's current subprime housing plan. The text of his speech can be found here: http://www.whitehouse.gov/news/releases/2007/12/20071206-9.html
I have reproduced President Bush's speech in full below, albeit with commentary of my own offered in red....
1:23 P.M. EST
THE PRESIDENT: Good afternoon. Before turning to the situation in the housing market, I send my sympathy to the families of those murdered in Omaha, Nebraska, yesterday. I was in Omaha just before the shooting took place, and I know what a difficult day it is for that fine community. The victims and their loved ones are in the prayers of Americans. The federal government stands ready to help in any way we can. And our whole nation grieves with the people of Omaha.
I just had an important discussion on the housing market with Secretary Paulson, heh-heh "Paulie!"... I like to call him "Paulie," Secretary Jackson - heh-heh, "Jackie!" - and members of the mortgage industry.
The housing market is moving through a period of change, where "change" means "substantial price adjustment from ridiculous levels". In recent years, innovative mortgage products have helped millions of Americans who should have remained renters pretend to believe that they could afford their own homes -- and that's been good for bonuses of securitizers on Wall Street, for mortgage brokers, for real estate agents, and others, but not so good for the health of the broader credit-bloated national economy. Unfortunately, some of these products were used responsibly, while the vast, vast majority were used recklessly & irresponsibly. Some lenders who were compensated for volume made loans that borrowers did not understand, especially in the sub-prime sector. Some borrowers took out loans they knew they could not afford by lying to lenders about their own personal finances - lenders, in turn, played along with this fraud. And to compound the problem, many mortgages are packaged into securities and sold to investors called "suckers" or "bagholders" or "Asian Central Bankers" around the world. So when concerns about sub-prime loans in Red States begin to mount -- began to mount, uncertainty spread to the broader financial markets where not only Secretary Paulson's former Wall Street colleagues earn giant golden parachutes, but on whom the GOP relies for campaign contributions.
Secretary Paulson and Secretary Jackson and Chairman Bernanke are monitoring developments in the housing markets where they personally own houses, and working to limit the disruption to those neighborhoods, and secondarily to our overall economy. Data released this morning confirmed the difficulties facing the housing market. Yet one reason for confidence is that the downturn in housing comes against a backdrop of solid fundamentals in other areas -- including low inflation *cough* *cough*, a healthy job market, record-high exports. America's economy has proved itself highly resilient -- and it is strong, and it is flexible, and it is dynamic enough to weather this storm...begging the question, "Then why is the administration seeking to interfere with the operation of market solutions?" I don't have an answer to that, so I will not be taking questions after this brief speech.
For individual homeowners, the problem is more difficult. Many of those feeling financial stress made a reckless gamble on ever-escalating home values and therefore have an adjustable rate mortgage, which typically starts with a lower interest rate and which has often involved interest-only payments, meaning that they never demonstrated any commitment to increasing home equity, and then resets to a higher rate after a few years. Many of those borrowers cannot afford the higher payments, and now are whining about their predicament and insisting that responsible Americans bail them out of the contracts into which they freely entered. If you are familiar with my trackrecord as a businessman *wink*, you'll understand why I am sympathetic to bailouts. And now some are fearing foreclosure -- which is a terrible burden for hardworking families, and a source of concern for entire communities and neighborhoods across our country.
The rise in foreclosures would have negative consequences for 2008 GOP electoral prospects, future Wall Street bonuses and our economy. Lenders and investors would face enormous losses, and government should dictate a "free market" that only produces winners - no losers. So they have an interest in supporting mortgage counseling and working with homeowners to prevent foreclosure until a Democrat administration.
The government has a role to play as well by screwing up the already appalling circumstances further through non-market intervention. We should not bail out lenders, real estate speculators, or those who made the reckless decision to buy a home they knew they could never afford; but you know we're working our way to eventually advocating this. Yet there are some responsible homeowners who could avoid foreclosure with some assistance (although the quick-witted among you will immediately recognize the self-contradiction in my use of "responsible" and "assistance") -- and in August, I announced a series of targeted actions to help them. My administration has moved forward in three key areas. I will outline those three now, but understand that they represent the policy beachhead for many more future "key areas" for "targeting" in 2008... this is just an opening salvo on market intervention efforts.
First, we've launched a new initiative at the Federal Housing Administration called "FHA Secure." This program gives the FHA greater flexibility to offset refinancing to homeowners -- to offer refinancing to homeowners who have good credit histories but cannot afford their current payments. In just three months, the FHA has helped more than 35,000 people refinance. And in the coming year, the FHA expects this program to help more than 300,000 families, hopefully exclusively in Red states.
Second, in August, I asked Secretaries Paulson and Jackson to work with lenders and loan servicers and mortgage counselors and investors and lions and tigers and bears on an initiative to help struggling homeowners find a way to refinance into permanent indebted servitude. They assembled a private sector group called "HOPE NOW PAY LATER Alliance" -- their leaders are with us today. HOPE NOW PAY LATER is an example of government interference bringing together members of the private sector to "voluntarily" (or else, *wink*) address a national challenge -- without taxpayer subsidies or without government mandates. I'm pleased to announce that our efforts have yielded a promising new source of relief for American homeowners, but no new source of credit, now that the market for mortgage-backed securities is utterly dead.
Representatives of HOPE NOW PAY LATER just briefed me on their plan to help bailout deadbeat homeowners who will not be able to make the higher payments on their sub-prime loan once the interest rates goes up -- but who can at least afford the current, starter rate. Granted, I just made hash of the very concept of "homeowner," since in the absence of our meddling, that home "owner" would be dispossessed of the asset and returned to the roll of renters where he rightfully belonged. But focus-testing shows that "homeowner" has powerful salience, so I will use it at every juncture. HOPE NOW members have agreed in the presence of Paulson's goons on a set of further reductions to industry-wide standards which is the original source of today's problems to provide relief to these deadbeat borrowers in one of three ways: by refinancing an existing loan into a new private mortgage, by moving them into an FHA Secure loan, or by freezing their current interest rate for five years.
Lenders are already refinancing and modifying mortgages on a case-by-case basis. My advisors assure me that I was taught about market mechanisms back in college, but I can't remember the details. With this systematic approach, HOPE NOW PAY NEVER, I mean, LATER will be able to help large groups of homeowners all at once. This will bring more relief to more homeowners more quickly. "More" tests well in focus groups, too. HOPE NOW VOTE FOR US estimates there are up to 1.2 million American homeowners who could be eligible for this assistance.
Public awareness among deadbeats & fraudsters, but not so much among responsible young renters with downpayment cash who we are truly screwing is critical to this effort, because the group can only help homeowners who ask for it. So HOPE NOW recently mailed hundreds of thousands of impulsively-discarded junkmail letters to borrowers falling behind on their payments, and they have set up a counseling hotline that Americans can call 24 hours a day. I've directed Secretaries Paulson and Jackson to expand the public awareness campaign. And I have a message for every homeowner worried about rising mortgage payments: The best you can do for your family is to call 1-800-995-HOPE.* That is 1-800-995-H-O-P-E.* Call now, and I'll throw in this lovely toaster!
Third, the federal government is taking several regulatory actions to make the mortgage industry more transparent, reliable and fair now that the horse is four counties removed from the barn doors that I only now have shut. Later this month, the Federal Reserve will cut interest rates in a desperate effort to prop our debt-bloated economy, and also intends to announce stronger lending standards that will help protect borrowers who found it just too darned troubling to tell lenders the truth, or to read a loan document before putting their signature to it. At the same time, HUD and the federal banking regulators are taking steps to improve disclosure requirements -- so that homeowners can be confident they are receiving complete, accurate and understandable information about their mortgages.
As we take these preliminary steps, the Department of Justice will continue to pursue wrongdoing among individual homeborrowers who may have misrepresented their financial situation, but less so our rich friends in the banking and housing industries -- so we can help pretend to ensure that those who defraud American consumers could conceivably face justice.
These measures will help many struggling homeowners -- and the United States Congress has the potential to help share the electoral wrath in 2008 even more if I can help it. Yet in the three months since I made my proposals, the Democrat-controlled Congress has not sent me a single bill to help homeowners, which makes them a temporary friend of all free market-loving Americans. If members are serious about responding to the challenges in the housing market, they could do nothing and allow the market to sort things out as quickly as possible; but since that ain't gonna happen, they can start with the following steps that echo the price-freeze idiocy of the Nixon era.
First, Congress needs to pass legislation to modernize the FHA. In April 2006, I sent Congress an FHA modernization bill. This bill would increase access to FHA-insured loans by lowering down payment requirements, allowing the FHA to insure bigger mortgages in high-cost states, and expanding FHA's authority to price insurance fairly, with risk-based premiums. Now, if these sorts of policies seem to you to be of the sort that created the problem in the first place, then you're very likely a renter. This bill could allow the FHA to reach an additional 250,000 families who could not otherwise qualify for prime-rate financing, and who should otherwise remain renters, but who for some freakish reason, practically every public official is trying to crowbar into a home mortgage. Last year, the House passed the bill with more than 400 votes -- and this year, the House passed it again. Yet the Senate has not acted, since 97% of their members are running for President. The liquidity and stability that FHA provides the market of current homemortgagers are needed more than ever with an election year imminent -- and I urge the United States Senate to move as quickly as possible on this important piece of legislation.
Second, Congress needs to temporarily reform the tax code to help deadbeat homeowners who should have remained, and who should otherwise return to being, renters refinance during this time of housing market stress, where "stress" means, "return to pricing sanity". Under or behind or buried within the monstrously complicated current tax law that keeps legions of tax accountants fully-employed, if the value of your house declines and your bank forgives a portion of your mortgage, the tax code treats the amount forgiven as taxable income, since you didn't have to come to closing with that cash, but instead, the bank did. When you're worried about making your payments, higher taxes are the last thing you need. The House agrees, and recently passed this relief with bipartisan support. Yet the Senate has not responded. This simple reform could help many American homeowners in an hour of need -- and the Senate should pass it as soon as possible. All the foregone tax revenue will be covered by further issuance of public debt that we will stick to next generation.
Changing the tax code can also help state and local government do their part to help homeowners and bear the electoral consequences for the mess. Under current law, cities and states can issue tax-exempt bonds to finance new mortgages for first-time home buyers. My administration has proposed allowing cities and states to issue these tax-exempt mortgage bonds for an additional purpose: to refinance existing loans. That way, we can produce ever more debt to make good on previous debt until the mountain of debt is high enough for us all to scramble up to the pearly gates of Heaven. This temporary, although if adopted, likely to become permanent subsidizing measure would make it easier for state housing authorities to help troubled borrowers who should otherwise be renting -- and Congress should approve it quickly, so that we can distract political heat away from the White House for a while.
Third, Congress needs to pass funding to support mortgage counseling, 'cause, as a politician, I know that talk is cheap. Non-profit groups like NeighborWorks provides essential service by helping homeowners find affordable mortgage solutions and prevent foreclosures. My budget requests nearly $120 million for NeighborWorks and another $50 million for HUD's mortgage counseling programs. And while I've not inquired recently, I'm sure HUD's become the model for efficient use of tax payer spending, err, I mean government borrowing from future generations. Heckuva job, Jackie! Congress has had these requests since February, yet it has not sent me a bill -- and they need to get the funding to my desk, because of that irritating document, the Constitution.
Fourth, and mercifuly lastly, Congress needs to invent an aeronautical pig and thereafter, to pass legislation to reform Government Sponsored Enterprises like Freddie Mac and Fannie Mae. These institutions admittedly are as bankrupt as they are corrupt to their very core - just ask that guy Raines, but provide excessive liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly, although if ya think they do *wink*, then there's a bridge in Crawford I'd like to sell ya. So I've called on Congress to pass legislation that propels pigs through space and that strengthens independent regulation of the GSEs -- and ensures they focus on their important housing mission. The GSE reform bill passed by the House earlier this year is a good start. But the Senate has not acted. And the United States Senate needs to pass this legislation soon. Yes, I am repeating myself.
The holidays are fast approaching and, unfortunately, this will be a time of anxiety for Americans worried about their mortgages and their homes, which is why I am short the consumer retail sector. There's no perfect solution, but I've made things worse by assuming that the market can't correct that and instead that the homeowners deserve our help. And the steps I've outlined today are a sensible response to a serious 2008 electoral challenge. I call on Congress to move forward quickly, and join me in delivering relief to homeowners in need at the expense of responsibile Americans who did not get caught up in the idiocy, and into whose hands the real estate assets might otherwise efficiently pass -- so we can keep our economy healthy and the American Dream alive.
God bless.
END 1:35 P.M. EST
* 1-888-995-HOPE
Thursday, December 6, 2007
Monday, December 3, 2007
Treasury Paulson December 3 2007
Our Treasury Secretary spoke today. His speech is here: http://www.treas.gov/press/releases/hp706.htm
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!").
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!").
Monday, November 12, 2007
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