by Calculated Risk on 12/07/2007 01:44:00 PM

Secretary of the Treasury Henry Paulson hosts a Q&A.

Randall, from Kearney, Ne writes:
Why are we responsible for bailing out the ARM lenders, or if you insist, the borrowers that were fully informed of the consequences of an Adjustable Rate Mortgage? This is for the benefit of lenders, isn't it?

Henry Paulson
Let me say first, this is not a bail-out – there is no federal money involved in what was announced yesterday. It’s a private-sector led initiative that is to the benefit of everyone – the families who face losing their homes, the neighborhoods and communities they live in, as well as mortgage servicers and mortgage investors. Foreclosure is to no one’s benefit. I’ve heard estimates that mortgage investors lose 40-50 percent on their investment if it goes into foreclosure.

Because everyone loses in foreclosure, the industry – lenders and investors – already has a process for working with struggling borrowers to avoid foreclosure whenever there is a better option for everyone. What we announced yesterday is simply a streamlining of this process.

There are 1.8 million owner-occupied subprime ARMs expected to reset in 2008 and 2009. The combination of lax underwriting standards when these loans were originated followed by stagnant or declining home values in the last two years means we expect a dramatic increase in the number of borrowers who are likely to find these mortgage resets unaffordable. The standard loan-by-loan process for working with struggling borrowers would not be able to handle the volume of work that will require. The industry needs a systematic approach, in order to cope with increased volume over the next few years, and we applauded them yesterday for putting forward just such a streamlined approach.

And let me be clear – we will not avoid all foreclosures. Borrowers who are struggling even with the lower initial ARM rate are unlikely to be eligible for assistance, and likely will become renters again. We worked with the industry to create a streamlined process so that those for whom there is a better solution don’t end up in foreclosure simply because the system was too overwhelmed to assist them in time.



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Alan, from Arizona writes:
Mr. Paulson Do you anticipate bank failures like England saw with Northern Rock?

Henry Paulson
Alan – I’m glad you asked this. The U.S. banking system is thoroughly regulated and well capitalized. We have a strong deposit insurance system that provides good coverage for the savings of hard-working Americans. Another thing to remember as we work through this mortgage market turmoil is that we’re confronting these challenges against the backdrop of a strong global economy and a fundamentally healthy U.S. economy. Business investment has expanded in recent months, our exports are being boosted by the strong economic growth of our trading partners and the healthy job market has helped consumer spending continue to grow. But I have also been very clear that the housing decline is still unfolding, and I view it as the most significant current risk to our economy.

More Q&A at the link.