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"These are not normal times"

Treasury Secretary Henry M. Paulson takes on disclosure, foreclosure and getting closure on the sub-prime crisis.

December 20, 2007

Treasury Secretary Henry M. Paulson visited the editorial board to discuss the sub-prime crisis, and the Department of the Treasury's responses to it. The department is organizing a voluntary loan-modification program designed to stave off the growing rate of defaults and foreclosures.

All the disclosure that fits on one page

Henry Paulson: The key is to get the balance right and not go so far that you cut off credit and make the situation worse. The Fed has also been looking at disclosure. I think when you look at the mortgage area, it's almost a caricature of what you see in other areas. You've got pages and pages of disclosure, which doesn't mean you're getting the people good information that they can understand. It's sort of, "Everybody cover their rear end," protect themselves legally. But, I've made the case several times, with all the disclosure there should be one simple page signed by the lender and the borrower that says, "Your monthly payment is x and it could be as high as y in a couple of years." The Fed I know has done some real consumer research on this.

How does the Treasury plan work?

Henry Paulson: I view it as government facilitating the industry coming together to prevent a market failure. And the way I think about it is this: that historically when a homebuyer, homeowner has a problem, a default's clearly not in the homeowner's interest. And it's clearly not in the lender's interest. It's very costly; defaults are very costly. So in a normal world the two sides come together and they strike a deal. Today we're dealing with two factors that make this more difficult. First, as you know, the institution or company that made the mortgage no longer holds it. It's spread all around the world with investors. That creates a cumbersome, complex decision-making process. It's one that can be dealt with when you've got home prices rising or you've got a stable mortgage market. But what we have is a volume of resets increasing, and they're going to be at a very high level next year, 1.8 million resets in 2009. What this program does is get the industry together — we've had eight more firms join, we cover 90% of the market. Investors have signed on, which is very potent, to have the investors signing on right along with the servicers.

Tom Petruno: Is there a list of the investors who have signed on?

Henry Paulson: I don't know if there's a list. The American Securitization Forum has 36 investors, and so there's...

Tom Petruno: Individual?

Henry Paulson: Yes. Oh, absolutely.

Tom Petruno: I don't think they've been quite forthcoming with that.

Henry Paulson: I don't know whether they have or not, but I'll tell you, I was quite aware when they had the vote, and the number of investors that voted, and I think that's an important part of this... People talk about contracts, and the servicing agreement doesn't just give servicers flexibility: They've got the responsibility for making modifications that are in the best interest of the investor group. So I want to step back for a second and say, with this industry coming together, we're bringing people together to avoid a market failure. The industry's dealing with an unprecedented situation, and the steps they're taking to fast-track these modifications are intended to approximate an outcome that's a market-related outcome.

And the way we had it there is: A number of servicers at more sophisticated institutions were already doing this. Because they said, "How are we going to deal with what's coming down the road?" And as I talk about this I think in some instances the press and the public have focused on the wrong thing, because they focused on the interest-rate freeze. Because this is not about an interest-rate freeze. This is about foreclosure avoidance. And so what you see is, there's some systematic process that's been established, such that there is a group of homeowners who are not going to afford the higher rate, and can't afford to stay in the home — these are people who have made the initial payment — and they will be fast-tracked into a modification with an interest-rate freeze.

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