By Martin H.
Bosworth
ConsumerAffairs.com
January 7, 2008
Under fire for the Bush administration's proposed mortgage rescue plan, Treasury Secretary Henry Paulson defended the move as necessary to preserving the country's economic stability.
In a speech today, Paulson warned that even with the plan in place, "the housing and credit disruptions have slowed our economic growth, and the housing downturn remains the greatest risk to our economy."
"By preventing avoidable foreclosures, we will safeguard neighborhoods and communities, and fulfill our primary responsibility of protecting the broader U.S. economy," Paulson said. "However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years."
Under the Bush mortgage rescue plan, qualifying homeowners saddled with adjustable-rate mortgages may be able to "freeze" their payments at the current, lower rate before they reset.
The plan is only open to homeowners living in their homes and not behind on their payments, leaving both speculators who bought properties to "flip" and delinquent homeowners out in the cold.
Paulson deflected criticism that the plan constituted a "bailout," and that investors in mortgage-backed securities would lose money due to the rate freezes.
"Mortgage servicers have contractual obligations to their investors, who are spread all over the world," Paulson said. "Servicers will fulfill these contractual obligations by pursuing all loss-mitigation options when it is in the best interest of investors, as they normally would. Investors are part of this industry-wide solution because they recognize the benefits of avoiding preventable foreclosures."
Consumer advocates have also criticized the plan for not going far enough or helping enough homeowners. Paulson noted that of the 450,000 potentially struggling homeowners contacted as part of the plan, only 45,000 have responded to the offer of assistance.
Paulson also urged Congress to act on legislation that would modernize the Federal Housing Administration (FHA) and enable homeowners with adjustable-rate mortgages to more easily refinance into fixed, government-backed loans.
The Senate passed legislation that would raise the limits for loans backed by the FHA from $362,000 to $417,000, in order to help borrowers with "jumbo" loans in hot housing markets, as well as lowering the amount of money required for a down payment. The Senate bill must be reconciled with similar legislation in the House that extends the loan limits to $500,000.
Although Paulson stressed that growth would continue and that the American economy would weather the housing slump, he cautioned against expecting any sort of quick fix, even from the Bush administration's own plan.
Increases in foreclosures and delinquency in loan payments would contribute to a drag on the country's economic strength for some time.
"We will likely have further indications of slower growth in the weeks and months ahead," Paulson said. "The overhang of unsold houses will contribute to a prolonged adjustment, and poses by far the biggest downside risk."
