Friday, December 21, 2007

Paulsonomics

by Tanta on 12/21/2007 09:55:00 AM

With a curtsey to sunsetbeachguy, we stare in wonder at an interview with the Treasury Secretary in the LAT.

On disclosures:

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.
I also have done some real research on this. I have found that when you prepare a simple, one-page document that says, "Your monthly payment is x and it could be as high as y in a couple of years, and you can't afford that, which is why we are denying your application for credit," you call it an "Adverse Action Notice" instead of a "Disclosure." But that kind of runs into that "cutting off credit" problem.

On interests, best:
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.
Historically, homeowners had a down payment invested in the property; also, historically homeowners who defaulted knew they'd have a hard time getting credit again in the future. Having removed the downpayment and minimal credit standards, there isn't much "cost" to default for a lot of people. Furthermore, if a default is costly to the "lender," then it is surely costly to whoever the "lender" is today. Why a transfer of servicing rights would, in and of itself, remove the incentive for working out loans is still kind of hard to see. But, as Paulson notes, this incentive failure can be responsibly managed when defaults are not costly. We pay this guy with tax dollars.

The whole interview goes on for a lot longer, but I can't take any more of this. You all will have to take it apart in the comments.