Paulson Asserts Subprime Plan Isn't Federal Bailout

Treasury Secretary Henry Paulson defended the Bush administration's subprime mortgage plan, saying it is not a federal bailout for homeowners, investors or banks.

"There is no government money in this," Paulson said in a live interview on CNBC. "This is the private sector coming together to deal with the complexities coming out of the securitization process. We needed to facilitate this to bring them together so they would have the capacity to deal with the coming wave of (mortgage) resets."

Treasury Secretary, Henry Paulson
Treasury Secretary, Henry Paulson

The plan, announced Thursday by President Bush, would freeze interest rates on some subprime mortgages that are scheduled to rise in the coming months.

The effort is aimed at stemming a wave of foreclosures in coming years as 2 million subprime mortgages--loans provided to borrowers with spotty credit histories --reset from their introductory rates of around 7 percent to 8 percent to levels as high as 11 percent, adding hundreds of dollars to the typical monthly payment.

A recent surge in mortgage defaults, part of the worst housing slump in more than two decades, has piled up billions of dollars in losses for big banks, hedge funds and other investors while roiling financial markets worldwide. Some economists think the housing bust may become severe enough to push the country into recession.

"The biggest risk we have is housing, and housing is a big drag on our economy," Paulson said in the CNBC interview. "We are going through a turbulent time in the capital markets, that's a risk. So we're focused on the risk, but let's not forget that we have a healthy economy."

Bush earlier said 1.2 million people could be eligible for help. But only a fraction will be subject to the rate freeze. Others would get assistance in refinancing with their lenders and moving into loans secured by the Federal Housing Administration, Bush said.

Also, the aid will only come to those who ask for it, he said. Thousands of borrowers who are falling behind on their payments have been sent letters about the options, and Bush also urged people to call a new hot line: 1-888-995-HOPE.

"Investors don't benefit from foreclosures," Paulson said in the CNBC interview. "What this plan does is let the private sector have the flexibility to do what the servicing agreement gives them, to adjust these mortgages, modify these mortgages, if its in the best interest of investors."

"All the investors I've talked to have been generally supportive," he continued. "But there's a lot of complexity."

The announcement followed the news earlier Thursday that home foreclosures surged to an all-time high in the July-September period. The Mortgage Bankers Association reported that the percentage of all mortgages that started the foreclosure process in the third quarter jumped to a record 0.78 percent, surpassing the previous record of 0.65 percent of all mortgages in the second quarter.

The president mentioned other steps to prevent foreclosures. The FHA has greater flexibility to offer refinancing to homeowners with good credit histories. It is expected that this eventually will help 300,000 families, officials said.

The Federal Reserve is announcing stronger lending standards this month, while the Housing and Urban Development Department and federal banking regulators are acting to improve disclosure requirements, he said.


The highest-profile part of the plan would freeze introductory "teaser" rates on certain subprime mortgages, preventing from rates from jumping up for five years.

This offer would apply only to people living in their homes and who have not missed any payments at the lower rate. It also only would apply to loans taken out between 2005 and this past July 30 and scheduled to rise to higher rates in 2008 and 2009.

The hope is that the five-year freeze will buy time for the housing sales and prices to start rising again. Such a rebound would enable homeowners to refinance their current adjustable rate mortgages into fixed-rate loans with more affordable monthly payments.

The big sticking point in the negotiations was getting investors who had purchased the mortgages after they were bundled into securities to agree to accept lower interest payments. Critics have said even with a deal, there are likely to be lawsuits. But officials representing major players in the mortgage industry said they believed the plan would withstand any legal challenges and would help at-risk homeowners avoid defaulting on their mortgages.

The president also did not miss the chance to lash out at the Democratic-controlled Congress.

Bush blamed lawmakers for not sending him legislation that he said would show they "are serious about responding to the challenges in the housing market." One measure would give the FHA more flexibility; a second would change the tax laws temporarily to help people who have a portion of their mortgage forgiven by banks.

"The Congress has not sent me a single bill to help homeowners," Bush said.