White House Resists Mortgage Bailout
WASHINGTON - March 27, 2008 - The U.S. government may be left little choice but to lead an effort to relieve distressed mortgage holders because a tide of foreclosures that could swamp the economy will keep swelling without such a plan.
As clamor rises for federal help for homeowners who face losing their homes, U.S. Treasury Secretary Henry Paulson seems to be digging in his heels against a broad-brush effort.
Democrats say refusal to help homeowners allows the housing crisis spill over and taint the entire economy, risking recession, but the Bush administration says a bailout is not only unnecessary but would be excessively costly.
In the end, many analysts think the government’s hand will be forced — if not during the remaining 10 months of the Bush administration then early in the next one.
“I think government involvement of some kind, just as went on during the savings and loan crisis in the 1980s and during the 1930s, is inevitable,” said Allen Sinai, senior global economist with Decision Economics Inc. in Boston. “There’s simply too much bad mortgage paper out there,” he added.
Then there are “human casualties,” as people see their credit blotted, making them wary about spending and putting the economy is at risk of recession, if it is not in one already.
TAXPAYERS AT RISK
“Ultimately some taxpayer money will be necessary, I believe, and in fact some taxpayer money already has been put up in the effort to improve the credit situation within the financial system,” Sinai said.
Just how costly it would be to involve some government entity in purchasing or refinancing existing loans is anyone’s guess, in part because such a rescue could be structured to narrow down eligibility or made broad.
When the Resolution Trust Corp. was set up to liquidate assets of failed savings and loans in the 1980s, costs were estimated at $125 billion. But there are hundreds of billions of dollars worth of home mortgages at risk of arrears, in foreclosure or that homeowners have walked away from.
The Federal Reserve helped finance a rescue of Wall Street investment bank Bear Stearns by JPMorgan Chase and Co. and agreed to lend to securities firms, the first time since the 1930s it has offered credit to non-banks.
Still, Paulson this week sounded a tougher note than ever against any possibility of bailout for individual mortgage holders, singling out the growing number going “under water” as their loans exceed the diminishing value of their properties.
“Washington cannot create any new mortgage program to induce these speculators to continue to own these homes, unless someone else foots the bill,” Paulson told the U.S. Chamber of Commerce. He instead touted the value of a Treasury-brokered voluntary workout program for lenders who face higher payments as their adjustable-rate mortgages reset.
SHADES OF DEPRESSION ERA
Treasury’s own figures show about 1.5 million home foreclosures were started in 2007 with another 2 million to come in 2008 — a level of homeowner stress that lenders say has not been seen since the Great Depression of the 1930s.
Pressure for a more direct government effort to help mortgage holders is coming from contenders for the Democratic nomination to run in November’s presidential election. Meanwhile, Democratic lawmakers have drawn unflattering contrasts between the administration’s hands-off approach to individuals and its readiness to help big Wall Street firms.
“The voluntary efforts are not accomplishing much,” Democratic Rep. Barney Frank of Massachusetts, who heads the House Financial Services Committee, said dismissively of Treasury’s bid to broker talks between homeowners and lenders.
Frank has proposed a broader role for the Federal Housing Administration in soaking up bad mortgage loans and a special financial services risk regulator, possibly embodied in the Fed, to keep a tighter rein on future lending.
Paulson may be reluctantly pushed into accepting the extended role for the U.S. central bank. He has said the Fed and other key regulators should consider “a more formalized working agreement” to ensure non-banks get the same scrutiny as banks as their role grows in the nation’s financial system.
Jason Furman, a former Clinton administration economic adviser and director of the Brookings Institution’s Hamilton Project, said letting housing price declines continue is tantamount to pushing responsibility for a solution to the next administration.
“Virtually no one has expected that we’ve seen the bottom of home price declines and as they fall further, all of the same problems they’ve created for financial institutions, for individuals and the economy as a whole will just get more serious,” Furman said. “So this could potentially be Item No. 1 on the domestic agenda for the new president.”
Democratic contender Sen. Hillary Clinton advocates extending at least $30 billion to help state and local governments stave off foreclosures while her opponent, Sen. Barack Obama, wants an FHA-led program that could induce lenders to buy and refinance troubled loans.
By contrast Sen. John McCain, who has the Republican presidential nomination secured, sounds just like the Bush administration. He said this week it was “not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”
White House resists pleas for mortgage bailout
By Glenn Somerville | Reuters