Market can solve subprime crisis By Krishna Guha in Jackson Hole Published: September 2 2007 20:18 | Last updated: September 2 2007 20:18
The private sector will find ways to structure debt arrangements that will ensure that most US homeowners facing big increases in their mortgage payments will stay in their homes, Ed Lazear, chairman of the White House council of economic advisers has told the Financial Times. Mr Lazear said the administration did not believe it would be helpful to set up a government-sponsored vehicle to organise debt arrangements, which involve rescheduling or reducing payments by the borrower. I believe, and I think the president believes, that markets are very good at finding ways to solve problems, he said. He said he expected three-quarters of the 2.5m households facing increased interest charges would be able to stay in their homes, either by keeping up with the new payments, arranging refinancing or agreeing revised terms. About 20 to 25 per cent faced a real threat of foreclosure, he said, adding that the administration initiatives would help a significant fraction of these households. Mr Lazear said the Bush administrations efforts announced on Friday to help distressed homeowners were designed to back-stop the private sector process, rather than supplant it. The initiatives would make mortgage insurance available for households who recently fell behind on payments after their interest rates rose and would eliminate the tax penalty on mortgage write-downs Earlier, Ignazio Visco, the deputy governor of the Bank of Italy, expressed concern that the slicing up of mortgage pools into securities with different risk tranches could make it difficult to organise debt arrangements. Mr Lazear said the fact that these loans are split up makes it a bit more difficult, no question about that. But he said there were still strong incentives on both sides to reach agreement on arrangements that would minimise the overall economic loss and avoid the costs of foreclosure and sale. He said nostalgia for the days when a local banker could reschedule debt owed by a customer he knew ignored the fact that those bankers often lacked the means to do so because they could not draw on deep capital markets. Mr Lazear spoke highly of community groups that advise homeowners facing possible foreclosure, hinting at a possible request for additional grants for these entities. We might want to increase the scale of these things, he said. Mr Lazear said the administration would evaluate calls by Ned Gramlich, a former Fed governor, to extend federal or joint federal-state supervision to all mortgage originators. Mr Gramlich said there is a giant hole in the supervisory safety net with half of all subprime mortgage loans being made by independent mortgage companies subject only to state supervision. However, Mr Lazear said many proposals for additional regulation would worsen the subprime crisis, by making it more difficult for borrowers to refinance their loans. Copyright The Financial Times Limited 2007 ____________________________________________________________________________________ Boardwalk for $500? In 2007? Ha! Play Monopoly Here and Now (it's updated for today's economy) at Yahoo! Games. http://get.games.yahoo.com/proddesc?gamekey=monopolyherenow
