All the disclosure that fits on one page
Henry Paulson: The key is to get the balance right and not go so far that you cut off credit and make the situation worse. The Fed has also been looking at disclosure. I think when you look at the mortgage area, it's almost a caricature of what you see in other areas. You've got pages and pages of disclosure, which doesn't mean you're getting the people good information that they can understand. It's sort of, "Everybody cover their rear end," protect themselves legally. But, I've made the case several times, with all the disclosure there should be one simple page signed by the lender and the borrower that says, "Your monthly payment is x and it could be as high as y in a couple of years." The Fed I know has done some real consumer research on this.
How does the Treasury plan work?
Henry Paulson: I view it as government facilitating the industry coming together to prevent a market failure. And the way I think about it is this: that historically when a homebuyer, homeowner has a problem, a default's clearly not in the homeowner's interest. And it's clearly not in the lender's interest. It's very costly; defaults are very costly. So in a normal world the two sides come together and they strike a deal. Today we're dealing with two factors that make this more difficult. First, as you know, the institution or company that made the mortgage no longer holds it. It's spread all around the world with investors. That creates a cumbersome, complex decision-making process. It's one that can be dealt with when you've got home prices rising or you've got a stable mortgage market. But what we have is a volume of resets increasing, and they're going to be at a very high level next year, 1.8 million resets in 2009. What this program does is get the industry together we've had eight more firms join, we cover 90% of the market. Investors have signed on, which is very potent, to have the investors signing on right along with the servicers.
Tom Petruno: Is there a list of the investors who have signed on?
Henry Paulson: I don't know if there's a list. The American Securitization Forum has 36 investors, and so there's...
Tom Petruno: Individual?
Henry Paulson: Yes. Oh, absolutely.
Tom Petruno: I don't think they've been quite forthcoming with that.
Henry Paulson: I don't know whether they have or not, but I'll tell you, I was quite aware when they had the vote, and the number of investors that voted, and I think that's an important part of this... People talk about contracts, and the servicing agreement doesn't just give servicers flexibility: They've got the responsibility for making modifications that are in the best interest of the investor group. So I want to step back for a second and say, with this industry coming together, we're bringing people together to avoid a market failure. The industry's dealing with an unprecedented situation, and the steps they're taking to fast-track these modifications are intended to approximate an outcome that's a market-related outcome.
And the way we had it there is: A number of servicers at more sophisticated institutions were already doing this. Because they said, "How are we going to deal with what's coming down the road?" And as I talk about this I think in some instances the press and the public have focused on the wrong thing, because they focused on the interest-rate freeze. Because this is not about an interest-rate freeze. This is about foreclosure avoidance. And so what you see is, there's some systematic process that's been established, such that there is a group of homeowners who are not going to afford the higher rate, and can't afford to stay in the home these are people who have made the initial payment and they will be fast-tracked into a modification with an interest-rate freeze.
We've looked at the group. There are probably 1.8 million ARMs that are going to reset. There are probably 600,000 of those where they've made the initial payments, if you look at their credit ratings and other data, they will be fast-tracked into a modification. There's another 600,000 who have got stronger credit statistics, and as they're dealt with, some can afford the stepped-up rates, a reasonable number will qualify for a refinancing and can refinance at a lower rate than the original rate. And some won't qualify for a refinancing and will go through a somewhat longer process to make the case that they need a modification with an interest-rate freeze. But you're talking about 1.2 million where you're avoiding foreclosure. And then you're freeing up the resources [that the] industry has to work on the other 600,000, which would have to get a more customized approach. And there's a reasonable number of those that will result in foreclosure; people will become renters again. And there are others who will be put into a HUD product or some other form of refinancing. So again, this was never about "Let's see how many interest rates people can freeze." It's how can you avoid foreclosures that should be avoided, which are in no-one's interest.
I'll give you one example: If someone has made the initial payments on their mortgage, and they're going to have trouble making the reset, and the loan/value ratio is 97 or above, they move immediately into that category which is fast-track, because you know you've got to do a refinancing. So the criteria are set up to let the servicers do the processing quickly.
More air for an inflated market?
Jon Healey: Many of the people we speak with don't like this because they see the results of the government's work being sustaining housing values that should have been allowed to come down.
Henry Paulson: Again, I've given my answer to that. I think what we're doing is avoiding a market failure that would have forced housing values down in a way that was not in the investors' interest, and in a way that the market wasn't intended to work.
Tim Cavanaugh: How can you force values down? Why aren't values finding their natural level?
Henry Paulson: The way values would go down is, as I've said, you'd have market failure. You'd have a situation and again, I don't know how much more clearly I can say this I don't want to debate this with you; I just want you to understand the point, and you may have a different view. I spend a lot of time looking at markets and I say to you it's expensive for investors to have a foreclosure. You take a house, and 20-40% of the value you lose. It's hard to maintain homes. They're subject to vandalism. Lenders don't want to own homes. And lenders, in normal circumstances, when someone's able to meet the initial rate, there would be very often a modification, so what we're working against, as I said, is two developments.