Testimony of Federal Reserve Officials

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Good link to Treasury Department Press Releases

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PAULSON TESTIMONY

I plan to include several quotes from prominent government officials to help determine whether they are clueless or liars.

September 20, 2007
HP-565

Testimony of Treasury Secretary Henry M. Paulson, Jr.
Before the House Committee on Financial Services
On the Legislative and Regulatory Options
For Minimizing and Mitigating Mortgage Foreclosures

Credit Markets and the Overall Economy

Recently, there has been an adjustment taking place in the overall credit market and the mortgage market in particular. The current market turbulence stems from financial practices, but unlike many previous episodes of market volatility, takes place against a backdrop of a healthy U.S. economy and strong global growth.

The global economy also remains strong, with annual growth at around 5 percent and with many emerging market economies growing even more rapidly than the global average.

The U.S. officially entered a recession in December 2007 although the government did not admit it until December 2008.

As I have said before, the recent reappraisal of risk could result in some modest penalty to economic growth. However, as I noted at the outset, the economy was in strong condition going into the recent period of volatility, and while certain sectors like housing are undergoing a transition, overall economic fundamentals remain solid. It will take time for the current reappraisal to work itself out, but in my view the underlying strength of the economy should allow for continued growth.

We should not lose sight of the fact that the subprime mortgage market improved access to credit and homeownership for millions of Americans. Starting in the early 1990s, consumers with less-than-perfect credit histories were able to gain easier access to mortgage credit at interest rates above prime borrower rates. Individuals and families could use this new source of credit to tap previously illiquid home equity wealth through refinancing or to purchase homes. Subprime mortgage origination volume increased from less than 5 percent, or $35 billion, of total mortgage origination volume in 1994 to nearly 20 percent or $625 billion, in 2005. During this time period homeownership rates also increased, growing from 64 percent in 1994 to 69 percent today, some of which was due to expanded opportunities in the subprime mortgage market.

The growth in the subprime mortgage market (and the mortgage market generally) was facilitated to a large degree by securitization, a process by which individual loans are transformed into securities. In a typical private label mortgage securitization, the mortgage originator transfers loans to a securitization sponsor, who pools together mortgages into mortgage-backed securities, and sells pieces, or tranches, of these securities to investors. In this way, the securitization process allows for the creation of securities that better match investor preferences for particular types of risk, which broadens the availability of capital. The benefits of such development are (1) increased capital for mortgages resulting in more products and lower costs, and (2) greater dispersion of investor risk. While these are net benefits, securitization also has introduced some challenges which are described later and are the focus of additional work for the PWG.

Further expanding the potential investor base was the development of another structured product, the collateralized debt obligation (CDO), which purchases asset-backed instruments, such as mortgage-backed securities. Mortgage-backed CDOs, nearly 40 percent of the entire $500 billion CDO market in 2006, have been one of the major purchasers of mortgage-backed securities, in particular the lower-rated tranches. For both individual mortgage-backed securities and CDOs, the credit rating agencies work closely with the sponsor to rate the credit risk of various pieces of the transaction.

A key challenge in the current subprime mortgage market (and to a lesser extent in the prime market) is the significant amount of hybrid adjustable rate mortgages that will be resetting in the next few years. Hybrid adjustable rate mortgages have a fixed rate of interest, often free of amortization payments, for an initial period, resetting at an adjustable rate for the remaining term of the loan. The most popular hybrid adjustable rate mortgage was the 2/28 – a fixed rate for two years, then an adjustable rate for the remaining 28 years of the mortgage. The fixed rate of interest in the first two-year period was typically lower than the initial adjustable rate in the reset period, and it often had an even lower teaser rate at the outset.

Hybrid adjustable rate mortgages can be a useful product, and, in the past, rising house prices often enabled borrowers with hybrid adjustable rate mortgages to refinance on more attractive terms prior to the first reset. However, the recent trend of a decline in house price appreciation (or depreciation in home values) has made refinancing more difficult. Other problems in the subprime market (and in some cases in the prime market) include lax underwriting standards, especially in 2005 and 2006, which have led to a significant amount of early defaults. Finally, while this is not a new issue, mortgage fraud continues to be a problem and may have increased with growth in the subprime market over the past few years. Some of the most egregious individual stories in the subprime mortgage market involve some type of fraudulent activity that is already illegal. A combination of these factors has led to a significant spike in mortgage delinquencies and foreclosure starts. Much of the increase is concentrated in subprime adjustable rate products, and it is also concentrated in areas of the country that are experiencing some degree of economic difficulty or a decline in housing prices.

To address the current situation, President Bush recently announced an aggressive plan to help as many homeowners as possible stay in their homes and to improve our mortgage finance system for the future – the HomeOwner Protection Effort (HOPE). As part of HOPE, the Treasury Department has, in coordination with the Department of Housing and Urban Development (HUD), started working on a new foreclosure prevention initiative to help struggling borrowers. The goal is to expand mortgage financing options and to identify and reach struggling homeowners before they face hardships, helping them understand their financing options, and helping them to find a mortgage product that keeps them in their home. Community organizations, mortgage servicers, and mortgage finance entities all play key roles in helping borrowers avoid foreclosure. Community organizations, such as mortgage counselors, work with struggling borrowers to help them identify all the options available to them. Mortgage servicers are often the first contact with borrowers and they have tools available to help borrowers who are in trouble. And mortgage finance entities, whether it is the Federal Housing Administration (FHA), government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, or insured depository institutions, all develop mortgage products that borrowers can use to refinance existing obligations. I and other Treasury officials have held important and useful meetings with these organizations to understand the challenges borrowers face and to explore ways to help them. We will continue to do so in an effort to minimize foreclosures.

We are working very hard to try to help as many Americans as possible keep their homes.

We all understand that the GSEs have had some accounting and risk management problems in recent years. To some extent these problems are a result of their unusual construct – the private sector goal of increasing earnings led to the rapid growth in the GSEs' retained mortgage portfolios, and contributed to a lack of focus on internal controls and risk management. I see no benefit in restating these issues which have been well publicized and documented. It is worth noting, however, that the new managements at both institutions have improved their operations. Despite these improvements, however, there are still legitimate concerns about the systemic risk posed by the GSEs' retained portfolios due to their large size and the lack of ordinary and effective market discipline.

Does he mean that Fannie Mae and Freddie Mac lacked the market discipline demonstrated by Bear Stearns, Merrill Lynch, Citigroup, Goldman Sachs, Morgan Stanley and AIG?

We are starting to see encouraging signs that other markets, such as the jumbo mortgage market (loans greater than $417,000), are loosening up but these markets are not functioning as normal. While some financial institutions are more willing to take these loans onto their balance sheets than they were weeks ago, others are in a sense compelled to do so because the demand for jumbo and other non-conforming mortgage backed securities (and other asset backed securities) has broken down and liquidity concerns remain. Over time, we expect market conditions to improve. In other areas, such as subprime, this process will take even longer. Market liquidity will adjust as investors reassess risks and return, relative to the underlying fundamentals. But all of this will take time as markets digest new information.

Thomas Jefferson

Thomas Jefferson:

"This country is headed toward a single and splendid government of an aristocracy founded on banking institutions and monied corporations, and if this tendency continues it will be the end of freedom and democracy; the few will be ruling and riding over the plundered plowman and the beggar."

He may have been early with this call, but in the end, he will be proven to have been correct...

SEC Loosens Oil Accounting Rules

SEC Changes Oil Rules

Watch for oil companies to register asset increases on their balance sheets. The SEC has announced a new rule that will allow companies to book unproven, but expected, oil reserves on their books, as assets. Previously, oil companies could only declare oil assets that they'd actually proven. As WSJ notes, oil companies had complained that the old accounting rules didn't take into account new technology that might indicate the presence and volume of oil without having actually proven it.

This sounds like a rule that will protect investors, doesn't it? Gotta love the SEC.

It Couldn't Have Happened to a Nicer Guy

Alberto Gonzales, former Attorney General of the United States, torture advocate, enemy of the Constitution, and known liar, says that he can't find a job. He also said that he is writing a book, but nobody will publish it.

Maybe there is more hope for America than I thought!

LINK

Gonzales Defends Role in Antiterror Policies

By EVAN PEREZ

WASHINGTON -- Alberto Gonzales, who has kept a low profile since resigning as attorney general nearly 16 months ago, said he is writing a book to set the record straight about his controversial tenure as a senior official in the Bush administration.

.....

Mr. Gonzales, 53 years old, doesn't have a publisher for his book. He said he is writing it if only "for my sons, so at least they know the story."

The chapters on the Bush administration's surveillance program, which involved eavesdropping without court warrants, and other controversial aspects of his work, remain blank. That is in part because he remains under investigation regarding allegations of political meddling at the Justice Department.

He's probably counting the days until he receives his pardon from his buddy George W.

The Harvard Law School graduate, onetime corporate lawyer and Texas judge also hasn't been able to land a job.

.....

Mr. Gonzales also downplayed his role in formulating opinions that allowed the CIA to use aggressive interrogation methods, which included waterboarding. The memos have since been rescinded and replaced with opinions that explicitly call torture "abhorrent."