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.