By Bush administration standards, Henry Paulson, the Treasury secretary, is a good guy. He isn't conspicuously incompetent; and he isn't trying to mislead us into war, justify torture or protect corrupt contractors.
But Paulson's actions reflect the priorities of the administration he serves. And that, ultimately, is what's wrong with the mortgage relief plan he unveiled last week.
The plan is, as a New York Times editorial put it on Sunday, "too little, too late and too voluntary." But from the administration's point of view these failings aren't bugs, they're features.
In fact, there's a growing consensus among financial observers that the Paulson plan isn't mainly intended to achieve real results. The point is, instead, to create the appearance of action, thereby undercutting political support for actual attempts to help families in trouble.
In particular, the Paulson plan is probably an attempt to take the wind out of Barney Frank's sails. Frank, the Democratic chairman of the House Financial Services Committee, has sponsored legislation that would give judges in bankruptcy cases the ability to rewrite mortgage loan terms. But "Bankers Hope Bush Subprime Plan Will Scuttle House Bill," as a headline in CongressDaily put it.
As Elizabeth Warren, the Harvard bankruptcy expert, puts it, "The administration's subprime mortgage plan is the bank lobby's dream." Given the Bush record, that should come as no surprise.
There are, in fact, three distinct concerns associated with the rising tide of foreclosures in America.
One is financial stability: As banks and other institutions take huge losses on their mortgage-related investments, the financial system as a whole is getting wobbly.
Another is human suffering: Hundreds of thousands, and probably millions, of American families will lose their homes.
Finally, there's injustice: the subprime boom involved predatory lending — high-interest loans foisted on borrowers who qualified for lower rates — on an epic scale. The Wall Street Journal found that more than 55 percent of subprime loans made at the height of the housing bubble "went to people with credit scores high enough to often qualify for conventional loans with far better terms."
And in a declining housing market, these victims are stuck, unable to refinance.
So there are three problems. But Paulson's plan — or, to use its official name, the Hope Now Alliance plan — is entirely focused on reducing investor losses. Any minor relief it might provide to troubled borrowers is clearly incidental. And it is does nothing for the victims of predatory lending.
The plan sets voluntary guidelines under which some, but only some, borrowers whose mortgage payments are set to rise may get temporary relief.
This is supposed to help investors, because foreclosing on a house is expensive: There are big legal fees, and the house normally sells for less than the value of the mortgage. "Foreclosure is to no one's benefit," said Paulson in a White House interactive forum. "I've heard estimates that mortgage investors lose 40-50 percent on their investment if it goes into foreclosure."
But won't the borrowers gain, too? Not if the planners can help it. Relief is restricted to borrowers whose mortgage debt is at least 97 percent of the house's value — which means that in many, perhaps most, cases those who get debt relief will be borrowers who owe more than their house is worth. These people would be nearly as well off in financial terms if they simply walked away.
And what about people with good credit who were misled into bad mortgage deals, who should have been steered to loans with better terms? They get nothing: The Paulson plan specifically excludes borrowers with good credit scores. In fact, the plan actually provides an incentive for some people to miss debt payments, because that would make them look like bad credit risks and eligible for relief.
Now, Paulson's attempt to help investors, while doing little or nothing for distressed and defrauded borrowers, might make sense if his plan would reduce investor losses enough to seriously improve the overall financial situation.
But only a small fraction of subprime borrowers will qualify for relief, and many of these borrowers will eventually face foreclosure anyway. So the plan is unlikely to reduce overall mortgage-related losses by more than a few percent, at most — not enough to make any real difference to financial stability. Indeed, interest-rate spreads that have been signaling a crisis of confidence in the financial system didn't narrow at all when the plan was announced.
Still, you might say that the Paulson plan is better than nothing. But the relevant alternative isn't nothing; it's a plan that — like Barney Frank's proposal — would actually help working families. And that's what the administration is trying to avoid.
c.2007 New York Times News Service