Paulson Trying to Prevent “Market Failure”
January 10th, 2008Via: Smart Money:
U.S. Treasury Secretary Henry Paulson said Monday the administration is working to ensure that the subprime mortgage crisis doesn’t lead to a “market failure,” while urging Congress to pass bills to help troubled homeowners refinance their loans.
In prepared remarks for a speech to the New York Society of Security Analysts, Paulson warned that about 1.8 million subprime mortgages will reset to mostly higher interest rates over the next two years, “raising the potential of a market failure.”
Noting that the mortgage industry isn’t equipped to handle the volume of resets, Paulson said the administration is fostering an effort to “prevent this market failure,” citing its plan to help fast-track a large number of refinancings for borrowers able to afford their current mortgage rates but not the reset rate.
The administration estimates that as many as 1.2 million subprime borrowers could be helped by its initiative, either through refinancing or a workout. Those that can’t pay the reset rate and are unable to refinance will be eligible to receive a freeze on their starter rates for five years. Most mortgage services are expected to start fast-tracking borrowers in coming weeks.
Paulson defended the streamlined process against criticism that it is breaking mortgage contracts, saying mortgage servicers are fulfilling their contractual obligations by “pursuing all loss-mitigation options when it is the best interest of investors, as they normally would.”
At first when they announced the freeze, I balked, but this is actually pretty close to what I figured what the only reasonable work-around. The banks do lose profit from re-financing the ARMs to a reasonable fixed rate, but a lot less than a Domino cascade of defaults. Call me stupid, but I actually think this could be effective at staving off complete financial collapse.