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Hank Paulson Q&A

Written By Brian Hicks

Posted December 7, 2007

Hank Paulson Q&A

I thought you might want to see this Q&A session with Hank Paulson. For the complete version check it out here: http://www.whitehouse.gov/ask/20071207.html

The "at or near bottom of housing" theorist explains the bailout plan…

I’m sorry. What’s that, Paulson?

It’s not a bailout plan?

But a what?

Oh, sorry, it’s a "private-sector led initiative that is to the benefit of everyone…"

Uh huh…  If you believe that, my friends, I’ve got a bridge to sell. 

 

 


“Henry Paulson

Thank you all for writing in today. We’ve been hard at work over the past few months to develop ways to prevent some struggling homeowners from losing their homes. Many of you saw the announcement made yesterday to streamline the process of refinancing and modifying subprime loans for able homeowners – I look forward to answering your questions on that. But let me stress here at the outset, the approach announced yesterday is not a silver bullet. It is one piece of a plan President Bush has directed his Administration to pursue. We face a difficult problem and there is no perfect solution. But we will continue to work on this in an effort to preserve communities by preventing foreclosures.

Alan, from Arizona writes:
Mr. Paulson Do you anticipate bank failures like England saw with Northern Rock?

Henry Paulson
Alan – I’m glad you asked this. The U.S. banking system is thoroughly regulated and well capitalized. We have a strong deposit insurance system that provides good coverage for the savings of hard-working Americans. Another thing to remember as we work through this mortgage market turmoil is that we’re confronting these challenges against the backdrop of a strong global economy and a fundamentally healthy U.S. economy. Business investment has expanded in recent months, our exports are being boosted by the strong economic growth of our trading partners and the healthy job market has helped consumer spending continue to grow. But I have also been very clear that the housing decline is still unfolding, and I view it as the most significant current risk to our economy.

Randall, from Kearney, Ne writes:
Why are we responsible for bailing out the ARM lenders, or if you insist, the borrowers that were fully informed of the consequences of an Adjustable Rate Mortgage? This is for the benefit of lenders, isn’t it?

Henry Paulson
Let me say first, this is not a bail-out – there is no federal money involved in what was announced yesterday. It’s a private-sector led initiative that is to the benefit of everyone – the families who face losing their homes, the neighborhoods and communities they live in, as well as mortgage servicers and mortgage investors. Foreclosure is to no one’s benefit. I’ve heard estimates that mortgage investors lose 40-50 percent on their investment if it goes into foreclosure.

Because everyone loses in foreclosure, the industry – lenders and investors – already has a process for working with struggling borrowers to avoid foreclosure whenever there is a better option for everyone. What we announced yesterday is simply a streamlining of this process.

There are 1.8 million owner-occupied subprime ARMs expected to reset in 2008 and 2009. The combination of lax underwriting standards when these loans were originated followed by stagnant or declining home values in the last two years means we expect a dramatic increase in the number of borrowers who are likely to find these mortgage resets unaffordable. The standard loan-by-loan process for working with struggling borrowers would not be able to handle the volume of work that will require. The industry needs a systematic approach, in order to cope with increased volume over the next few years, and we applauded them yesterday for putting forward just such a streamlined approach.

And let me be clear – we will not avoid all foreclosures. Borrowers who are struggling even with the lower initial ARM rate are unlikely to be eligible for assistance, and likely will become renters again. We worked with the industry to create a streamlined process so that those for whom there is a better solution don’t end up in foreclosure simply because the system was too overwhelmed to assist them in time.

Sam, from Gaithersburg, MD writes:
How will the administration’s plan to fix interest rates for five years affect investors? Will they continue to receive the interest income they expected during this time and, if so, how? Aren’t you concerned that if investors are forced into a rewriting of their investment agreements that you will cause many investors to forego future investments in mortgage-backed securities or home loans?

Henry Paulson
I think it’s important to note here that what was announced yesterday was spear-headed by a trade association that represents investors, the American Securitization Forum (ASF). ASF worked on these new guidelines because it is in fact in the best interest of the investors to avoid preventable foreclosures; investors know how expensive foreclosures are. They know that if a borrower can afford the starter rate but not the reset rate, a modification is less costly to them than foreclosure. Investors have been at the table to help develop this plan from the beginning.

The plan announced yesterday does not change the fundamentals of the contract between servicers and investors. Servicers have always been charged with collecting payments on behalf of investors, and when a borrower falls behind in his payments, working with the borrower to reach an outcome is in the best interest of the mortgage investors. Whenever a mortgage is modified or foreclosed, that changes the payments to investors – that is the nature of the investment. This streamlined plan announced yesterday continues that relationship between investors and servicers, it gives servicers an additional tool to identify when a streamlined refinance or modification is in the best interest of the mortgage investors.

 

Michael, from Cleveland, OH writes:
How were you able to protect this plan from the inevitable lawsuits that could follow. We need to move fast with any solution and any sort of legal scuffle could de-rail this effort. I applaud the idea, despite being unsure of what "unintended" consequences may surface in the future.

Henry Paulson
Well Michael, this is America, so we know there is always the risk of litigation. But we need to remember that the job of mortgage servicers is to manage loans in the best interests of all the investors in the mortgage pool. Under these industry standards, the servicer would only do a modification where it is in the best interests of the investors. Indeed, these industry standards are the product of discussions among investors and servicers. With the investor community on board and the clear beneficiaries of this plan, the risk of litigation should be manageable.”