The Subprime Monologues

Thanks to the wonders of webcasting, I spent a large chunk of this afternoon listening to president George Bush, Treasury secretary Hank Paulson, HUD secretary Alphonso Jackson, ASF executive director George Miller, FDIC chairman Sheila Bair, as well as men in suits from the FRB, the OTS, the OCC, OFHEO, and elsewhere.

The range of emphases was broad. Bush concentrated on the politics, chastizing the Senate for not passing mortgage-related bills. Paulson was very much the technocrat; Jackson concentrated on the narrative of suffering families. But amidst a lot of grand rhetoric there was some actual news. The bit which jumped out at me is that the mortgage freeze has been explicitly designed as a last-ditch solution which only becomes an option after refinancing opportunities have been exhausted.

Specifically, there was a lot of talk by the president and others about the way in which many subprime borrowers are already able to refinance their loans through the FHA's FHASecure plan. The president would like that plan expanded; according to him, it's stuck in the Senate somewhere. But the key point about the subprime mortgage freeze is that it's only available to people who are not eligible for FHASecure or something similar. In other words, the first best solution for any subprime borrower is to refinance into a federally-insured loan – something which smells a little bit like bailout to me. Only if that doesn't work will the private sector step in with its streamlined process for freezing teaser rates.

I also liked the way in which the president talked about reforming the tax code so that short sales, say, or any refinancing which involves a reduction in principal, would for some temporary amount of time no longer generate a large windfall tax bill.

And I was encouraged too when I heard Sheila Bair say that "in many cases it would make sense to extend the modification for a longer period" than the five years outlined in the present plan. There's no reason that shouldn't happen, she said, if it makes sense for all concerned.

This plan has its critics in the blogosphere, as well as its defenders. Of course it doesn't solve the subprime problem at a stroke – no plan could. But there's more to it than a simple five-year freezing of teaser rates. And it's undeniably a step in the right direction.