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The Glass Bead Game

Clive Crook Is Unhappy with Treasury Secretary Paulson's Mortgage Plan

In what one very prominent economist once called "the only real newspaper," the Financial Times:

FT.com / Columnists / Clive Crook - The trouble with the Paulson plan: “This is a private sector effort, involving no government money,” Hank Paulson, US Treasury secretary, said last week, announcing the deal he had just brokered among representatives of mortgage-security investors and mortgage-service companies to freeze interest-rate resets on some loans. He emphasised that the compact was voluntary. “The industry standards announced today do not change the nature of responsibilities in the servicing industry – servicers will continue to modify loans when it is in the best interests of investors.” In short, he said, it is a “market-based approach”.

Give the man some credit for using that term without laughing. Is there a housing-finance market on the planet that is more pervasively manipulated and distorted by government....

What does this heart-warming, globally significant, limited and strictly voluntary agreement to serve the interests of investors in mortgage-backed securities actually do? It is concerned with a subset... 1.8m of the mortgages recently granted to subprime borrowers... are due to reset in the next two years.... The complex deal proposes to freeze the resets on some of these loans, and offers help for some borrowers in switching to more affordable (often FHA guaranteed) loans....

The real point of the agreement is to lay out a standard approach to modifications that would have happened piecemeal – a template that can be widely applied... minimise the litigation risk that mortgage servicers would otherwise face in modifying terms without investors’ specific approval....

Barney Frank... points out, the plan bizarrely confines its promised assistance to borrowers with poor credit histories.... Borrowers who struggled to improve their credit scores before taking out their mortgages are going to feel aggrieved. In many cases, the reward for those efforts will be eviction.

An evidently reluctant Mr Paulson took fright at the gathering storm and decided that he had to act. The unavoidable consequence is that the administration now owns the problem.... As the housing slump worsens... the measures... will be deemed... unfair and inadequate. It will be too late then to say: “This is none of our concern.”

From now on, every mortgage foreclosure will be seen as proof of the policy’s failure – and partly the administration’s fault. Merely to address the most obvious anomalies in the new arrangements, more comprehensive and more generous assistance seems likely before long. In other words, the massively distorted and mismanaged US housing-finance market is going to get more so. And taxpayers had better prepare to be mugged.

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