Paulson, Jackson & Bernanke Head For The Hill In Search of Mortgate Mess Solutions
Thursday, September 20, 2007PAUL KANGAS: Treasury Secretary Henry Paulson, HUD Secretary Alphonso Jackson and Federal Reserve Chairman Ben Bernanke were on Capitol Hill today testifying before the House Financial Services Committee. The topic - ways to solve the nation's mortgage mess. But the overall economy took the spotlight when Bernanke was asked about the reasoning behind the Fed's rate cuts. Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: This was Ben Bernanke's first chance to explain to Congress why the Federal Reserve slashed interest rates on Tuesday. The Fed chairman described the cut as a preemptive move. The goal -- to keep tighter, more risk adverse credit markets from choking off the economy.
BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: We took that action to try to get out ahead of the situation, try to forestall potential effects of tighter credit conditions on the broader economy.
GERSH: Contrary to what some have argued on Wall Street, Bernanke says over-leveraged hedge funds are not the main problem for the markets now. The focus of concern is on so-called structured credit products, which might hold everything from credit card receivables to airline leases. Bernanke called these products opaque.
BERNANKE: Part of what's taking so long here is for this process to go forward as banks and investors work through these products and figure out what's in them and what they're worth.
GERSH: Lawmakers asked Bernanke whether the Fed kept interest rates too low for too long, pumping up the housing bubble and contributing to the resulting market meltdown. The Fed chairman countered it wasn't just the United States which saw housing boom.
BERNANKE: As the Federal Reserve lowered interest rates to 1 percent and then raised them gradually, mortgage rates did not respond very much to those short-term rates. They were in fact primarily determined by the long-term rates determined in international capital markets.
GERSH: Some analysts argue the Fed was behind the curve in mid-August, stubbornly insisting inflation fears were the main economic risk. With an aggressive half-point cut in short-term interest rates, the Fed has now regained market credibility. It has also bought itself some flexibility. Economist Kathryn Kobe says the Fed has basically front loaded its market medicine rather than spoon it out over time.
KATHRYN KOBE, SR. ECONOMIST, ECONOMIC CONSULTING SERVICES: Did that all at once and say, here you go. This is what you kind of imply you need and here it is. But that's all you're going to get.
GERSH: The aggressive rate cut has made the dollar less attractive to foreign investors and Mr. Bernanke was asked whether the weak greenback might push up import prices and ignite inflation. The Fed chairman said he would make sure that did not happen. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
PRATT: As we mentioned, testifying before Congress today on how to fix the sub-prime mortgage mess -- U.S. housing and Urban Development Secretary Alphonso Jackson. He joins me now from Washington. Mr. Secretary, welcome to NIGHTLY BUSINESS REPORT.
ALPHONSO JACKSON, SECRETARY, HOUSING & URBAN DEVELOPMENT: Thank you so much Susan (sic) for having me.
PRATT: It seemed clear from today's testimony that the administration now is in favor of raising the $417,000 cap on mortgages that Fannie Mae and Freddie Mac can guarantee. Now can you explain for people how does that help fix the current problem with sub-prime loans?
JACKSON: What we have said is this. We're going to look at raising the cap, but we want it with strong regulatory reform. It's very important that we begin to regulate these two GSEs. It will help in many ways. First of all it would add additional liquidity to the process and that is one of the things that the banks have been calling for, more liquidity. Secondly, we believe that if Fannie or Freddie sold off some of their jumbo loans, they would still have enough liquidity to make loans to those moderate income persons that they should be making loans to. So yes, we are entertaining the idea of lifting the cap 2 percent a year. Of course they want it lifted more. But we believe that that is the best approach at this point, until they can demonstrate otherwise.
PRATT: All right, but we're also talking about a temporary lifting of the cap. Why temporary?
JACKSON: Because really as I just said a few minutes ago, Susan, they can sell off some of the jumbo loans and still have enough liquidity to make and underwrite other loans that are moderate income that their charter dictates that they do. So we are saying we are going to meet you partially by saying we'll lift the cap 2 percent a year, but we'll also look at how well the liquidity will flow once we lift that cap.
PRATT: Now by some estimates there are two million loans in danger of foreclosure. Only a fraction of those are going to be helped by the administration's proposal. What about the rest? What about the rest of the people?
JACKSON: Let me say this. We have projected that there will probably be two million foreclosures by 2008 or 2009. We believe that clearly if we pass the FHA modernization legislation, that will help an additional 250,000 people. Already President Bush with a new product that we call FHA secure, we will be able to help another 250,000 people. So we will help basically 500,000 low and moderate income persons. Now I will tell you, Susan, there are some people we are not going to be able to help. Those yuppies who took out these jumbo loans and also wanted two cars. Clearly they were educated enough to understand the fine print. But many teachers, fireman, police, nurses were not in that same position. And we feel an obligation that we must help them. Thirdly, we will not help any person who this a second home. A large percentage of that two million are second homes. And we are not going to bail those persons out.
PRATT: Let me just get your thoughts on the -- on this state of the housing market right now. You certainly talked to a lot of people in the housing industry. You talk to homeowners all the time. Where do you think we are in the housing correction?
JACKSON: I think that probably taking the steps that I've just outlined, lifting the cap from Fannie Mae, working with the commercial banks, I think that we are somewhere between 12 and 18 months away from really resolving this problem. And it's important to understand that this correction took place at the right time. Had the market continued to rise as it had been to 2008, 2009, we would have had a severe problem, a problem that we might not be able to work with as finely as we are working with this. That is not to dispel Susan that we still don't have a problem. We have a problem but I think it's workable at this point. And I think that both Chairman Bernanke, Secretary Paulson and I said that to the House Finance Committee today that we are looking at probably 12, 18 months, at the outset 24 months, but I think that we can resolve it much quicker than that.
PRATT: Let's leave it there. Thank you for joining us, my guest this evening, Alphonso Jackson, secretary of Housing and Urban Development.
