Clive Crook Is Unhappy with Treasury Secretary Paulson's Mortgage Plan

In what one very prominent economist once called "the only real newspaper," the Financial Times:

FT.com / Columnists / Clive Crook - The trouble with the Paulson plan: “This is a private sector effort, involving no government money,” Hank Paulson, US Treasury secretary, said last week, announcing the deal he had just brokered among representatives of mortgage-security investors and mortgage-service companies to freeze interest-rate resets on some loans. He emphasised that the compact was voluntary. “The industry standards announced today do not change the nature of responsibilities in the servicing industry – servicers will continue to modify loans when it is in the best interests of investors.” In short, he said, it is a “market-based approach”.

Give the man some credit for using that term without laughing. Is there a housing-finance market on the planet that is more pervasively manipulated and distorted by government....

What does this heart-warming, globally significant, limited and strictly voluntary agreement to serve the interests of investors in mortgage-backed securities actually do? It is concerned with a subset... 1.8m of the mortgages recently granted to subprime borrowers... are due to reset in the next two years.... The complex deal proposes to freeze the resets on some of these loans, and offers help for some borrowers in switching to more affordable (often FHA guaranteed) loans....

The real point of the agreement is to lay out a standard approach to modifications that would have happened piecemeal – a template that can be widely applied... minimise the litigation risk that mortgage servicers would otherwise face in modifying terms without investors’ specific approval....

Barney Frank... points out, the plan bizarrely confines its promised assistance to borrowers with poor credit histories.... Borrowers who struggled to improve their credit scores before taking out their mortgages are going to feel aggrieved. In many cases, the reward for those efforts will be eviction.

An evidently reluctant Mr Paulson took fright at the gathering storm and decided that he had to act. The unavoidable consequence is that the administration now owns the problem.... As the housing slump worsens... the measures... will be deemed... unfair and inadequate. It will be too late then to say: “This is none of our concern.”

From now on, every mortgage foreclosure will be seen as proof of the policy’s failure – and partly the administration’s fault. Merely to address the most obvious anomalies in the new arrangements, more comprehensive and more generous assistance seems likely before long. In other words, the massively distorted and mismanaged US housing-finance market is going to get more so. And taxpayers had better prepare to be mugged.

Comments

[Ken Houghton]

Not that he's wrong--far from it--but it's curious to see someone from the land of 100%, no money down mortgages as the norm calling out the US market as "pervasively manipulated and distorted by government."

[William Smith]

"The unavoidable consequence is that the administration now owns the problem"
Actually, I never thought of the problem in those terms, but if the plan fails, that might help spur greater reform later on. Then again, I might be looking at the future through Bush's glasses (too rosily) and it sickens my stomach to think of the 'meantime' between now and that future reform...

[christofay]

This has been widely noted:

MORTGAGE MELTDOWN: Interest rate 'freeze' - the real story is fraud. Bankers pay lip service to families while scurrying to avert suits, prison

Sean Olender, San Francisco Chronicle

http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/12/09/IN5BTNJ2V.DTL

[christofay]

Why not comment on the FT article that mentions this, 'Michael Feroli, an economist at JP Morgan, said: "It (the FHLBs hyper debt issuance this year) is almost like the socialisation of housing finance,"'from "Bank Co-ops Keep U S Afloat".

While everyone is focused on Greenspan and son of Greenspan, this other banking apparatus has been inflating year in year out.

[christofay]

From the FHLB floats the U. S. piece, the juiciest quote ever:

“The Federal Home Loan Banks have been leading a minor revolution in the financing of the US commercial banking system, providing funding for mortgages when other markets have been closed,” said Steven Abrahams, head of liquid products research at Bear Stearns.

Yes, we have PhDs in drinking the koolaid, "liquid products research."

I think you should support locals and do a post on the Chronicle Olender, appropriate name, op-ed piece.

[anne]

"In what one very prominent economist once called 'the only real newspaper,' the Financial Times...."

In what shows the terrible social and cultural shallowness of one very prominent economist.... I suggest the economist come to understand that I am no longer interested in being a close-minded regretful British imperialist. Latin America and Africa and Asia really do exist on their own and have a social and cultural existence that the British Financial Times seems beyond recognizing let alone understanding.

What does the Financial Time have to say about our insane occupation of Iraq?

[Emma Anne]

"Liquid products research" is priceless, Cristofay.

[Gerard MacDonell]

I was less impressed by the Crook article. I think he confuses the Paulson plan with the pre-existing state of housing finance. It is true that there is a major public subsidy to home ownership in the USA, but that was true before Paulson, as after. The question he fails to isolate is, what are the specific effects of the Paulson plan? Rather than answer that, he just offers a rant about how the American system is imperfect. Gee, shocker. A useful article would have dome some QUANTIFICATION. But that takes work.

[Ahab]

The vague notion ticklng my conciousness is that the Unites States of America has somehow become the resurrected, morphed progeny of that British imperialist system. And I am not speaking metaphorically.

[Matt]

The purpose, then, of the mortgage backed securities was to hold inflated value, fraudulently, during the period of when the fed was feeding the government expansion under Bush.

Once Ben is finished with this crisis, he will move on to the inflationary consequences as it applies to government expenses, trying to satisfy that cow, and on and on.

We will be here, fortunately or not, talking about this problem in 10 years, but the cycles are shortening. Each time the economy "filters" through one more cycle, it begins to compensate immediately for the next cycle, like a standard Kalman filter, which is what mammals do.

But as the predictors increase in accuracy, the cycles shorten, a good thing. Growth will come, actual, mysterious, Solow growth, will come in the next few years as we all employ new technology to outsmart the cycle over time.