Paulson Gets it Right on Housing

Hank Paulson’s speech

today about the housing market is spot-on, I think. Let me highlight a few passages,

since most of you aren’t going to read all 4,300 words:

Recent surveys have shown that as many as 50 percent of the borrowers who

have gone into foreclosure never had a prior discussion with a mortgage counselor

or their servicer. That must change.

The 50% number, if true, is ridiculously high: it should – and can –

come down to zero. This is partly a problem with borrowers in denial, but it’s

much more a problem with servicers. As Paulson says later on in his speech,

"not all servicers are staffed for aggressive loss-mitigation". If

banks and private-equity companies are buying up servicers, they should be closely

regulated to make sure that they invest a lot of time and money in loss mitigation.

We must also take steps to make more affordable mortgage products available

for struggling homeowners. In August, the President renewed his call on Congress

to pass FHA modernization to make affordable FHA loans more widely available.

To facilitate mortgage workouts, the President has also called on Congress

to temporarily eliminate taxes on mortgage debt forgiven on a primary residence.

This particular tax break, I think, is eminently justifiable. It’s piling insult

onto injury to charge income tax on the equity that individuals have lost in

their home.

We need simple, clear, and understandable mortgage disclosure. We must identify

what information is most critical for borrowers to have so that they can make

informed decisions. At closing, homebuyers get writer’s cramp from initialing

pages and pages of unintelligible and mostly unread boilerplate that appears

to be designed to insulate the originator or lender from liability rather

than to provide useful information to the borrower. We can and must do better.

The most critical facts, including potential future monthly payments, should

be on a single page in clear, easy-to-understand language, to be signed by

the borrower and the lender. In my judgment, this may have prevented many

of the problems that we are seeing today.

This is self-explanatory, and quite right. Such a development would certainly

help in the quest to keep brokers honest. Which brings me to this:

We need to bring a higher level of integrity to the mortgage origination

process. The development of a uniform national licensing, education, and monitoring

system for all mortgage brokers is worth considering.

This is the one part of the speech where I feel Paulson does not go far enough.

Yes, a national licensing system for brokers would be a good idea. But there

aren’t any teeth to what Paulson is proposing. I say that brokers should be

given a fiduciary duty over their borrowers.

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