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Paulson: No ‘Silver Bullet’ in Bid to Ease Mortgage Crisis

December 6, 2007 at 6:10 PM EST
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As home foreclosures reached a record high Thursday, President Bush announced a deal with mortgage lenders to freeze interest rates on some subprime mortgages due to move sharply higher soon. Treasury Secretary Henry Paulson discusses the details of the proposal.
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TRANSCRIPT

JIM LEHRER: The mortgage story. Judy Woodruff begins with an interview with Treasury Secretary Henry Paulson.

JUDY WOODRUFF: Secretary Paulson, thank you very much for joining us.

HENRY PAULSON, U.S. Treasury Secretary: Judy, it’s good to be here.

JUDY WOODRUFF: Tell us who exactly will be helped by this plan, and how will they be helped?

HENRY PAULSON: OK, Judy. Let me explain what’s been done and what’s been announced today. We still have a lot more work to do, and we’ve done a lot of work between now and August.

But what’s happened is that the mortgage industry has come together to devise a plan to help subprime mortgage borrowers whose rate is going to be facing a reset that they won’t be able to afford.

And as we’ve looked at the universe of buyers, Judy, there are some mortgage-holders who are obviously not going to need any help, and they’re not going to be affected by this. And there’s going to be another group that we’re not going to be able to help, because they won’t have the financial capability to afford a reasonable mortgage.

And so we’re focusing on the middle group. And what is being done is the industry — and here I’m talking about not just the servicers who collect the payments, but talking about the investors who hold the ultimate securities — have agreed to some simple criteria, some standard criteria, which is going to allow them to process modifications much more quickly.

And there will be a group of homeowners that meet the criteria and are going to have trouble meeting the higher rates, and they will have their rates frozen for five years.

JUDY WOODRUFF: So just to clarify here, of all the people who are facing problems here, how many? Do you have a number of how many will be helped?

HENRY PAULSON: Well, we are looking at a total of about 1.8 million adjustable-rate subprime mortgages which will reset in 2008 and 2009. And the industry estimates that there will be about 1.2 million of these who will qualify for a refinancing or a mortgage modification.

Government intervention

Henry Paulson
Treasury Secretary
To step back a bit, foreclosures don't just harm the homeowners who lose their home, or the neighborhoods where there are falling real estate prices and higher crime rates, or the U.S. economy overall.

JUDY WOODRUFF: And why did the government need to get involved in this? And is there taxpayer money involved?

HENRY PAULSON: Judy, there's no taxpayer money, and the government got involved for a very simple reason. There had been so much innovation and so much complexity in the mortgage market that it was difficult for the industry to solve the problem unless the government played a convening role to bring all the participants together.

And I would explain it this way. If you are a mortgage-holder, the odds are that the company that is collecting your mortgage, your monthly mortgage payment, is collecting it on behalf of investors who are spread all around the world. And so there's great complexity.

And then, on top of that, the number of resets is going to increase dramatically. And so there needed to be some way for investors to -- the investors, the owners of these securities, to handle the load of resets that they were going to be facing. And it's investors' interest that they're not be foreclosures.

To step back a bit, foreclosures don't just harm the homeowners who lose their home, or the neighborhoods where there are falling real estate prices and higher crime rates, or the U.S. economy overall. Foreclosures are not in the investors' or the lenders' best interest, because they're very costly. And so they...

JUDY WOODRUFF: Well, let me -- I just want to step in here, because, as you know, the criticism is coming from several directions, number one, that this doesn't help enough people. For example, some are saying you've just chosen an arbitrary date and people who are already in arrears are left out of this.

HENRY PAULSON: Well, Judy, this plan isn't perfect. There is no silver bullet that is going to undo the excesses in the housing market for the last number of years and bad lending practices, but this plan, will make a difference and is a very practical step forward.

Now, the industry has been doing a relatively good job of handling the mortgage resets we've had to date. Only about 15 percent or less of these resets have resulted in foreclosure. Most of them have resulted in loan modifications, or refinancings, or sales of the home.

But what the industry has done is they've looked and they've said that, We are not going to have the capacity to handle these modifications one at a time, given the wave we're going to be facing. And so how can we come together with some simple criteria, which will approximate what we would have done if we'd had to do it on a loan-by-loan basis?

Criticisms of the proposal

Henry Paulson
Treasury Secretary
If I ever saw a legitimate role for the government, it is a situation like this, where there's been so much complexity and innovation that it's outrun the private sector's ability to deal with it.

JUDY WOODRUFF: I'm just going to tick off a few other criticisms. I know you're familiar with all of them. One is that this plan depends too much on the voluntary willingness of the private sector to participate.

HENRY PAULSON: Well, this is -- right. It is a -- the private sector has come together, and they've worked hard, and they've been working hard, and we've been working hard on this since August. And this is private sector driven, and the private sector's coming together to deal with a very practical problem, and I think it's going to make a real difference.

JUDY WOODRUFF: All right. On the other side, we are hearing criticism from groups who argue that it's heavy-handed for the government to even be involved as a convener. For example, the Wall Street Journal editorializing today that, when the government's sitting at the table, companies feel, in effect, that they're hearing an offer they can't refuse.

HENRY PAULSON: Well, if I ever saw a legitimate role for the government, it is a situation like this, where there's been so much complexity and innovation that it's outrun the private sector's ability to deal with it, and so for the government to convene all of the various participants as they work together for a solution.

And I think if you'd heard the press conference today, where you heard the people representing the investors and representing the servicers, I think that's exactly what you would hear.

JUDY WOODRUFF: You also hear comments or criticisms having to do with the sanctity of contracts. Martin Feldstein, who worked as economic adviser to President Reagan, is saying, "Potential investors are going to think, well, the government" -- that these contractual agreements that have been made can no longer be respected, because government is stepping in and saying, "We've changed that."

HENRY PAULSON: We're very sensitive to this. There's no way we're violating the sanctity of contracts. And here it's very important for me to give you a more detailed answer.

There are proposals in Congress to change bankruptcy laws. There are proposals in Congress to change either the sanctity of contracts, in terms of immunizing servicers from lawsuits. What this does is it is the private sector coming together to do what the contracts allow them to do.

The servicing agreement expects the servicers to make loan modifications that are in the best interests of the investor group. And what has happened here is the industry has come together. The investors have joined with the servicers and said, "This is in our best interest."

And if we had been modifying the loans, if we'd had time to modify the loans, refinance the loans, underwrite them on a case-by-case basis, we'd be doing that, but we're not going to be able to handle the volume. And so we need to come together and come up with some procedures and some criteria that are going to help us do this much more quickly, to the benefit of our investor group and, obviously, to the benefit of neighborhoods and homeowners and the community, because there are going to be enough foreclosures as it is, and we need to avoid those that are preventable.

Corrective measures

Henry Paulson
Treasury Secretary
There are suggestions that have to do with regulation of the mortgage origination process. There are suggestions that have to do with unfair lending practices, and the Federal Reserve is going to be coming out with some rules there.

JUDY WOODRUFF: I hear you.

Stepping back for just a moment, Secretary Paulson, what about the Wall Street investment firms? That's the place, of course, where you spent the bulk of your career. Were they wrong to package and sell these securities based on these loans that they themselves didn't think were good investments?

HENRY PAULSON: Well, let me step back there, also. And I'm glad you asked the question, because we have two focuses, OK? I have two focuses.

I have one focus which is a very immediate focus, which is to deal with the problems and the dislocations in the capital markets and the credit markets more generally, and in the mortgage markets specifically, and do everything we can to help homeowners in distress, and to mitigate the spillover into the general economy of this country. So we've got an immediate focus.

We then have -- all of us policymakers have a focus to say, "How do we take corrective actions to prevent these sorts of problems from arising in the future?" Now, we don't want to go so far that we cut off the flow of affordable credit to many homeowners and many citizens of the U.S., and securitization has had a good number of benefits.

So, for instance, yesterday, the president's working group on financial markets met for a couple hours, and we've been working all the way along and saying, "What steps do we need to take?" And there are steps that have to do with our regulatory structure, because we have a patchwork quilt in this country, and Treasury will be coming out with some suggestions there.

There are suggestions that have to do with regulation of the mortgage origination process. There are suggestions that have to do with unfair lending practices, and the Federal Reserve is going to be coming out with some rules there.

There are a number of other things that relate to the rating agencies, that relate to the securitization process, and there's a lot of work that's being done in these areas.

Outlook for housing market

Henry Paulson
Treasury Secretary
And so we're watching it carefully. We're doing things that we think are appropriate here. And, you know, I've said I believe our economy is quite healthy, fundamentally strong, and we're going to keep growing.

JUDY WOODRUFF: Last question, Mr. Secretary. How much worse do you think this housing crisis will get before it gets better?

HENRY PAULSON: Judy, what I've said all the way along is that we have a healthy, diverse economy in the U.S., and we can be grateful for that and be grateful for the growth outside of the U.S. I think our economy is going to continue to grow.

Your question about the housing, that is the biggest risk to the economy, and it's one we need to watch closely. I'm not going to hazard a guess, because, I've got to tell you, if people looked at this a year ago, a number of economists would project that it would be better before now.

And so we're watching it carefully. We're doing things that we think are appropriate here. And, you know, I've said I believe our economy is quite healthy, fundamentally strong, and we're going to keep growing.

JUDY WOODRUFF: Henry Paulson, the secretary of the treasury. We thank you very much for joining us.

HENRY PAULSON: Judy, thank you.