Today, Treasury Secretary Henry Paulson added to his growing list of ill-aimed responses to the financial crisis. Treasury is reportedly “considering a plan to intervene directly in the mortgage industry,” under which it would “buy securities that finance newly issued loans for home purchases.” The justification is that “subsidizing lower mortgage rates with taxpayer dollars would help revive the housing market.”
Now, Paulson is finally headed in the right direction, offering a plan to purchase mortgage securities. However, buying securities for newly issued loans does nothing to stem foreclosures, and thus misses the point of purchasing securities entirely. The problem in the financial system was not caused by recently issued mortgages, but by toxic mortgages that are already on the books.
Chairman of the Federal Reserve Board Ben Bernanke last week took an important step by directing the Fed to purchase mortgage backed securities from Fannie Mae and Freddie Mac. In a speech today, Bernanke explained the “public policy case for reducing preventable foreclosures”:
Foreclosures create substantial social costs. Communities suffer when foreclosures are clustered, adding further to the downward pressure on property values. Lower property values in turn translate to lower tax revenues for local governments, and increases in the number of vacant homes can foster vandalism and crime. At the national level, the declines in house prices that result from the addition of foreclosed properties to the supply of homes for sale create broader economic and financial stress.
Bernanke endorsed a “promising proposal” — similar to one crafted by the Center for American Progress — which “would have the government purchase delinquent or at-risk mortgages in bulk and then refinance them,” and thus “take advantage of the depressed market values of such mortgages.”
Already at the forefront of the push to stem foreclosures is Sheila Bair, Chairman of the Federal Deposit Insurance Corp. However, Bloomberg reported today that Timothy Geithner, the incoming Treasury Secretary, is looking to push Bair “out of office.” The Obama economic team has allegedly decided that “she won’t play a central role in policy,” even though Obama said yesterday that “We’ve got to start helping homeowners, in a serious way, prevent foreclosures.”
If Obama is serious about helping homeowners, it would be a mistake to freeze Bair out. At Bloggingstocks, Jim Cramer explained why Bair is “the franchise player to build around“:
When Indymac was seized (something I wish she had done earlier, but she waited as long as she could), she and her organization became the laboratory, the great central testing zone for what will work and what won’t work to stem foreclosures, the root cause of all of our financial problems. She was ignored, systematically ignored, even though she had the knowledge base.
Paulson has insisted on doing everything except addressing foreclosures. Bair, meanwhile, has found a formula that works. To purge her makes no sense at all.