Text of Full Interview
Tess Vigeland: Mr. Secretary, thank you so much for joining us.
Henry Paulson: Tess, it’s good to be with you.
Vigeland: Are we better off than, say, six months ago, before the government’s rescue efforts, or is the housing situation getting worse?
Paulson: Tess, the housing situation is getting worse, so I think the right question to ask yourself though is “are we better off than we would have been if we hadn’t had the government’s efforts?” and the answer there is a resounding yes, because what we’ve seen is since this Hope Alliance Network was put together, a million homeowners, struggling homeowners, have received modifications with their mortgage, so we’re helping people avoid foreclosures that are preventable.
Vigeland: One criticism of that effort, the Hope Now Alliance, is that the vast majority of those workouts are simply delaying the inevitable. The terms of the loans don’t change and, in fact, that’s the case for about 75 percent of the workouts so far, so eventually, they’ll probably end up right back in trouble. Is it possible to resolve this crisis without changing the terms of these mortgage agreements?
Paulson: Well, Tess, the terms… by definition, every modification has the terms change and I’m not familiar with all the specific practices of every servicer and my focus has been on preventing foreclosures, but the industry here has made numerous changes. There are various types of modifications that are appropriate for different borrower situations and borrowers who are struggling with their mortgages and can’t afford the payments are getting modifications that are letting them stay in their house and they’re choosing these modifications rather than going into foreclosure, so there clearly are modifications that are being made and some rather significant modifications. And again, modifications are expensive for servicers, for lenders. They don’t want to put forward modifications that are going to result in an ultimate foreclosure.
Vigeland: I guess the question is how long these homeowners will be able to stay in their homes. My understanding is that a large percentage of these modifications have meant that, for example, homeowners can catch up on missed payments, payments that they’ve already missed, but that the underlying mortgage contract does not change, the terms of the mortgage aren’t changing.
Paulson: Well, first of all, Tess, by definition, every modification, terms of the mortgage change and they change rather dramatically. If a homeowner is able to avoid a step-up in the interest rate or a reset, that’s a major change in terms, but let me step back a minute. Let’s not lose sight here. The effort, the overall Hope Now Alliance, is aimed at reaching out to mortgage holders who are going to have problems with their mortgage and the regrettable fact is over half of those going into foreclosure never talk to anyone, and so a huge effort is getting to people for a wide variety of mortgage products and get them to come in and talk and the results so far have been gratifying in that the response rate has increased. It’s gone from 2-3 percent to 20 percent. Now, still 80 percent aren’t talking with anyone about solutions and if you don’t talk with someone, you can’t be helped. So that’s point number one. Secondly, the program that you have asked me about has to do with those homeowners who have a product problem. Adjustable rate subprime mortgages, where the rate is going to go up and they may not be able to afford that rate, and in the third quarter, only 6.5 percent of those mortgage holders in the country had adjustable rate subprime mortgages but yet that category resulted in 40 percent of the defaults, so we’re focused on that area. Now, when you look at that area, the biggest help we’ve all received has been the cut in interest rates, and so the interest rate environment has changed dramatically so that there’s much less payment shock and many fewer adjustable rate mortgage holders need help. Before we’d had this change in interest rates, if a mortgage holder had a $200,000 mortgage, their payment would have gone up $300 a month. Now it’s going up about $70 a month, because the interest rates would have gone from 8.5 to 10.8 percent. Now they’re going from 8.5 to 9 percent, so we’ve had some very good help there. But again, our focus and my focus is keeping those mortgage holders who want to stay in their house — and they can afford to stay in the house — in the house and that takes someone reaching out, dialing 888-995-HOPE, asking for help, responding to the servicer’s letters. That’s the first step. And again, I think that the effort for the Hope Now Alliance and when people signed on for this fast-track modification program as it relates to adjustable rate subprime mortgages, those servicers again are focused on helping those mortgage holders who have been able to make the initial payments make the change to stay in their home and the results there have been gratifying.
Vigeland: The Fed chairman, Ben Bernanke, said today the programs to date simply aren’t enough. He suggested that banks may actually have to reduce principle amounts on some of these mortgages in order to allow people to afford their homes. The bank would basically swallow the difference so that homeowners would regain some equity. Would you support that idea?
Paulson: Tess, where I’ve been all the way along here is that foreclosures are expensive. They’re expensive for the country, they’re expensive for the community, they hurt the homeowner and they’re very, very expensive for the lender or the investor; they cost them up to 40 percent. So what I’m very supportive of is bringing the lenders, the servicers and homeowners together and there will be instances where lenders are going to clearly see that the best solution for them which is less costly than a foreclosure is going to be a writedown of principle on a mortgage. They will do that in some instances. In other instances, they will go with a modification in the terms. The part of the program that I’d been talking about earlier had to do with adjustable rate mortgages and the product problem where there was a reset. The only point that I’ve made and that I continue to make is that there are more and more homeowners today that have bought homes, put no money down on a mortgage, have been betting that the price of their home is going to go up and some are walking away from that mortgage obligations and, as I look at it, if you own a home and you can afford to pay your mortgage payment then you have an obligation to do so and if you decide to walk away from that obligation, then the government — and here’s where I’ve been focused — the taxpayer should not be paying for your losses any more than they should have been paying for the losses of the day trader who speculated in technology stocks in 2000. So my focus is on the homeowner who wants to stay in the home, is willing to reach out, talk to someone to solve the problem and, again, if that homeowner wants to stay in the home and the fact that his mortgage debt is worth more than the price of the home, which it will be in some circumstances, and they want to find a solution, then I think, obviously, one of the solutions that lenders need to consider right along with modification will be whether or not to writedown the principle on that mortgage. But as I look at lending practices, even last year almost 30 percent of those people who took out mortgages put no money down on the mortgage. Traditionally, when people in this country have bought homes, they are looking at them as being a long-term investment, they are looking at getting roots down in the community and it’s not something that they walk away from if the value of the home is worth less than the value of the mortgage for some short period of time. So, again, my focus is on keeping homeowners in the home who want to stay in the home and are willing to reach out and talk to someone and work with their lenders to do something about that.
Vigeland: There is growing pressure for the administration and Congress to come up with a federally-financed solution, for example, having the government buy up distressed mortgages, but you have come out saying you would not support that idea.
Paulson: Yes. There’s support for some massive intervention in some cases, for the government to come in, and here I step back and I say let’s put this in perspective. 93 percent of the 55 million mortgage holders in this country are making their mortgage payment every month, right on time. Only 2 percent are in default. When there were massive government programs put into place after the depression, the foreclosure rate was 50 percent. The unemployment rate was 20 percent. Now we have agencies to deal with this. We have the FHA and this administration has been very actively supporting an FHA modernization program which would help struggling subprime borrowers. We have that program. There are a number of programs we have in place, some involving some federal money: tax relief for mortgage holders who get the kind of relief that you were talking about where the bank reduces the principle on the mortgage. We don’t want them to have to pay taxes on that forgiveness of debt. We have a proposal for tax-exempt financing for state and local governments to let them deal with the problems of mortgage holders in their communities. But again, when we look at what’s going on in this country, it’s not a nationwide phenomenon and it’s different in different parts of the country. Four states greatly skew the data and if you look at Arizona, Florida, California and Nevada — and those are the states where the housing prices were going up at an unsustainable level. Bakersville, Calif.: housing prices went up 122 percent between 2002 and 2006. Miami, Fla.: 107 percent. Las Vegas: 97 percent. So there’s an inevitable decline that’s going to come about there, and then there are other areas of this country where there’s economic stress: Cleveland, Ohio, Detroit, Mich. Therefore, President Bush and this administration have a stimulus plan that is going to deal with those people that are threatened because of an erosion of income. As I look at housing, there’s two specific problems: some people have foreclosures when there’s an erosion of income, some because of a product problem. We have a stimulus package which is going to get cash out to consumers early in May and is going to be largely completed by the first week in July and we’ve got a program that’s aimed at helping those borrowers who’ve got product problems and who want to stay in the home and have the capability to stay in the home. As we talked about the subprime borrowers, in the 2006 vintage of subprime mortgages, where there were very lax underwriting standards, 18 percent of those homeowners went into default when they were six months away from the first reset. They didn’t have the capability to own the home. If you can’t make your initial mortgage payment, you don’t have the capability to own the home. If you’re not willing to talk to someone and reach out to help, I don’t see how the government can help you.
Vigeland: Do you have any proposals for regulating the industry given that a lot of these people got mortgages that they couldn’t afford because the banks gave them to them?
Paulson: Tess, that’s a very good question. We’ve had two approaches here. The first focus is getting through this problem of distress with as little negative impact on the economy overall, doing everything we can to prevent a market failure and avoid preventable foreclosures and secondly, the stimulus package and working with the banks and encouraging them to take their losses and raise capital, because if they raise capital, they’ll be well-capitalized and they’ll be able to continue lending rather than shrinking their balance sheet. The second is what is the appropriate regulatory response and we’ve been working hard here at Treasury looking at a policy response. I chaired the President’s Working Group on Financial Markets and the Fed with Ben Bernanke and Chris Cox at the SEC and the CFTC and other regulators are a part of this and we will be coming out in the weeks ahead with our policy response, our recommended actions to deal with some of the issues like the mortgage origination problem in the U.S. and some of the issues directly related to that, to have policy recommendations as it relates to securitization, it relates to the rating agencies, some of the valuation issues, transparency issues, and the key there will be to come up with policies that reduce the likelihood of these things happening again without going so far that we hurt the overall economy or cut off capital to people. Also at Treasury, we are preparing a regulatory blueprint because our regulatory system is a good one, but it is not perfect. It’s far from perfect and it’s a patchwork quilt and it could be improved. Much of this was put in place many years ago and we need something that’s designed for today’s economy and one of the aspects we’re going to look at here is looking at, again, the mortgage origination process and how that is being regulated or not. Also, another line of pursuit which doesn’t fall under my responsibility is vigilant law enforcement activities, because a good deal of fraud took place here and I think it’s very important that wrongdoers be dealt with expeditiously.
Vigeland: You mention the need for banks to raise capital and it does seem like these days we get writedown after writedown from the banking industry. Today Citigroup is taking another hit after the head of Dubai International Capital said that foreign investment may not even save the company. Can banks — private industry — solve this crisis?
Paulson: Well, let me say this Tess. We went in to this period of turmoil with our banks being well-capitalized and it’s important that they stay that way, so we’re encouraging them. We’re encouraging Fannie Mae and Freddie Mac, we’re encouraging our various banks that they raise capital. Capital is available to them. I feel quite confident that our major financial institutions are going to remain viable. So the key question is not that, but the key question is are they going to shrink their balance sheets and thereby hurt the U.S. economy because they restrain their lending and making money available to consumers and business or are they going to raise capital and continue to play a significant role in the economy and I’m encouraging them to raise capital. We’re also going through a period of great risk aversion in our capital markets and it’s taking a while to work through this period. Many of the credit markets aren’t trading as normal, they’re not functioning as normal. Some of the excesses that took place in the housing market and in the credit market took years to build up, and so it’s naturally going to take some time to work through it, but I have great confidence in our markets and the way they work and I know that sentiment which had been very positive a year ago, where institutions were actually reaching out and looking for risk and were too confident, it swung back very hard to risk aversion, but remember that over time, we’ve always seen this, markets work. Investors focus on fundamentals and astute investors have repeatedly recognized that sentiment always changes and they’ve been able to take opportunities like this, which are opportunities for them because they see that stress and strain in the capital markets often creates investment opportunities. So again, I’m confident that we’ll work through this period of stress. It’s something we’re watching very carefully right now and I have great confidence in our markets.
Vigeland: Finally, I wanted to ask you a bit of a philosophical question. You touched on this earlier that there is this real new phenomenon of a lot of people simply walking away from their homes, thinking that, you know, if they’re upside down on a house, they actually owe more than the house is worth either because values have dropped so drastically, so it makes more sense for them financially to simply walk away. This is really a new mentality, isn’t it?
Paulson: Well, Tess, I don’t want to overstate that. Moody’s has put out numbers that say roughly 8.8 million Americans have no equity or negative equity in their home. I believe the majority of those and the vast majority of Americans are not going to walk away from their obligations because a home is more than a financial investment for them. A home… they put down roots in a community. It’s a long-term investment, so I don’t believe the vast majority are going to walk away. I think there have been certain people that are speculators and it’s been easy to be a speculator. Looking back over the last five or six years in some of these hot markets, we’ve taken the view that if we put no money down that we’re going to make money and if we don’t, then we can walk away and I don’t think that’s the kind of behavior we want to have rewarded. If what it takes to keep them to live up to their obligations is having the government pay for their losses, I think that would be doubly expensive. It would be expensive in the first instance asking taxpayers who are working hard to make their mortgage payment to pay the speculators’ losses and secondly, it would be encouraging that kind of behavior in the future and I think we’re going to see a behavior change as a result. Yesterday, I said in my remarks that I was a bit surprised to see that 30 percent of the homebuyers in 2007 put no money down. If you put no money down, you may get a behavior change, because buyers are less invested in keeping their homes than ever before and maybe more of them are going to be willing to walk away if the home loses value. But again, I don’t think those speculators should be the focus of our public efforts and I believe you’re going to see lenders and investors change their policies because they’re going to understand that prudent lending requires them to have homeowners be vested in that home purchase. So that’s the way I would answer your philosophical question and Tess, thank you very much. It was good to be with you today.
Vigeland: Mr. Secretary, thank you for your time today.