- The Washington Times - Saturday, September 22, 2007


In his testimony before the House Committee on Financial Services, Treasury Secretary Henry Paulson, perhaps recalling his days as the former chairman and CEO of Goldman Sachs, observed, “Larger fundamental reappraisals in the pricing and appetite of risk have taken place numerous times over our nation’s history, which is fundamentally the way that markets work. We are in the process of another such reappraisal period today.” Preceding these remarks he used to describe the near panic that seized the credit markets in recent weeks, Mr. Paulson offered an upbeat assessment of the U.S. and global economies. He later concluded that “the underlying strength of the economy should allow for continued growth.”

Federal Reserve Chairman Ben Bernanke and Housing and Urban Development Secretary Alphonso Jackson joined Mr. Paulson on the same panel. On the eve of the seventh year of the current expansion, Mr. Bernanke reported that “serious delinquencies among subprime adjustable-rate mortgages [ARMs] have increased dramatically.” Compared to mid-2005, the fraction of subprime ARMs past due 90 days or more or in foreclosure has increased about 200 percent, reaching 15 percent in July. “About 320,000 foreclosures were initiated in each of the first two quarters,” Mr. Bernanke said. That’s more than 40 percent higher than the average during the past six years. More than half of the recent foreclosures were connected to subprime mortgages, which are extended to homebuyers with poor credit history. More ominous for the future, the Fed chairman noted that “sharp deceleration in home prices since 2005, including outright declines in some markets, left many of these more-recent borrowers with little or no home equity,” effectively depriving them of the ability to refinance into a fixed-rate mortgage as their initial “teaser” interest rates are about to reset. Moreover, serious delinquency problems have also infiltrated the so-called alt-A mortgage market, which occupies the area between subprime and prime markets.

Despite the supposedly glowing economy, Mr. Bernanke acknowledged that “many homeowners who took out mortgages in recent years are in financial stress.” And that stress will only intensify. Subprime mortgages accounted for 20 percent of home loans last year; alt-A loans accounted for 13 percent; and so-called jumbo loans, which exceed $417,000 and cannot be securitized or purchased by the government-sponsored enterprises such as Fannie Mae and Freddie Mac, represented another 16 percent. Nearly $1 trillion in ARMs are scheduled to have their interest rates reset before the end of next year, a development that will dramatically raise the monthly mortgage payment of homeowners living in houses whose values may well be falling, perhaps precipitously. Mr. Paulson’s optimistic economic assessment will need to be very accurate — at the very least — as the race for 2008 plays out on both ends of Pennsylvania Avenue.

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