The Subprime Monologues

Thanks to the wonders of webcasting, I spent a large chunk of this afternoon

listening to president George Bush, Treasury secretary Hank Paulson, HUD secretary

Alphonso Jackson, ASF executive director George Miller, FDIC chairman Sheila

Bair, as well as men in suits from the FRB, the OTS, the OCC, OFHEO, and elsewhere.

The range of emphases was broad. Bush concentrated on the politics, chastizing

the Senate for not passing mortgage-related bills. Paulson was very much the

technocrat; Jackson concentrated on the narrative of suffering families. But

amidst a lot of grand rhetoric there was some actual news. The bit which jumped

out at me is that the mortgage freeze has been explicitly designed as a last-ditch

solution which only becomes an option after refinancing opportunities

have been exhausted.

Specifically, there was a lot of talk by the president and others about the

way in which many subprime borrowers are already able to refinance their loans

through the FHA’s FHASecure

plan. The president would like that plan expanded; according to him, it’s stuck

in the Senate somewhere. But the key point about the subprime mortgage freeze

is that it’s only available to people who are not eligible for FHASecure

or something similar. In other words, the first best solution for any subprime

borrower is to refinance into a federally-insured loan – something which

smells a little bit like bailout to me. Only if that doesn’t work will the private

sector step in with its streamlined process for freezing teaser rates.

I also liked the way in which the president talked about reforming the tax

code so that short sales, say, or any refinancing which involves a reduction

in principal, would for some temporary amount of time no longer generate a large

windfall tax bill.

And I was encouraged too when I heard Sheila Bair say that "in many cases

it would make sense to extend the modification for a longer period" than

the five years outlined in the present plan. There’s no reason that shouldn’t

happen, she said, if it makes sense for all concerned.

This plan has its critics

in the blogosphere, as well as its defenders.

Of course it doesn’t solve the subprime problem at a stroke – no plan

could. But there’s more to it than a simple five-year freezing of teaser rates.

And it’s undeniably a step in the right direction.

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