Paulson calls for more mortgage oversight
WASHINGTON (AP) - March 13, 2008 In a new Bush administration initiative that Paulson said is not
about "finding excuses and scapegoats," a presidential working
group set up in the wake of the 1987 stock market crash is calling
for a series of actions designed to avert the kind of chilling
housing and credit crunches that are threatening to throw the
nation into recession - if it isn't there already.
"The objective here is to get the balance right - regulation
needs to catch up with innovation and help restore investor
confidence but not go so far as to create new problems, make our
markets less efficient or cut off credit to those who need it,"
said Paulson, who heads the working group.
One recommendation calls for federal and state regulators to
strengthen oversight of mortgage lenders and another urges state
financial regulators to implement strong nationwide licensing
standards for mortgage brokers, according to the group's report,
released Thursday.
On Wall Street, Paulson's comments and the working group's
recommendations failed to give solace to skittish investors. The
Dow Jones industrials plunged more than 190 points in morning
trading.
The group also called for improvements by credit rating agencies
that have been criticized for not accurately assessing risk on
complex mortgage investments. These kinds of business transactions
eventually soured, driving markets into chaos. The working group
also is calling for better disclosures and assessments of risks on
investments.
The recommendations come as the meltdown in the housing and
credit markets has unhinged Wall Street, catapulted home
foreclosures to record highs and forced financial companies to rack
up multibillion losses on bad investments in mortgage backed
securities.
The mess threatens to plunge the country into its first
recession since 2001.
The president's working group on financial markets was formed
after the 1987 stock market crash to monitor markets. It includes
Federal Reserve Chairman Ben Bernanke and the heads of the
Securities and Exchange Commission and the Commodity Futures
Trading Commission.
More recently, the group has been looking into the causes of the
current credit crisis and searching for ways to prevent a
recurrence.
In a speech to the National Press Club, Paulson said: "This
effort is not about finding excuses and scapegoats. Those who
committed fraud or wrongdoing have contributed to the current
problems; authorities need to, and are prosecuting them. But poor
judgment and poor market practices led to mistakes by all
participants," he added.
The next step, Paulson said, is to push for implementation of
the recommendations. He said the working group will continue to
assess the situation and consider whether further steps are needed.
Fielding questions after his speech, Paulson repeated comments
that a strong U.S. dollar is "in our nation's interest," a
position long stated by past U.S. treasury secretaries. The dollar
has been falling sharply against other currencies, such as the
euro. That is helping sales of U.S. exports to foreign buyers
because it makes U.S. goods less expensive. But the drooping dollar
also is increasing inflation pressures.
The working group also recommended that credit-rating agencies
differentiate between ratings on complex investment products and
conventional bonds, Paulson said. The ratings agencies also should
disclose conflicts of interest, he said.
The group also called on issuers of mortgage-backed securities
to provide more information about their products(AP) - , Paulson
said. The group urged investors to conduct more independent
analysis of investments and be less reliant on ratings agencies, he
said.
"There is no single, simple solution to the problems that have
emerged ... yet we have determined that market participants'
behavior must change," Paulson added.
The meltdown in mortgage and credit markets first started with
problems with "subprime" mortgages made to people with tarnished
credit histories or low incomes. These borrowers were especially
clobbered when the housing slump dragged down home prices and
mortgage rates rose. Home foreclosures and late payments
skyrocketed as these borrowers found it increasing difficult - if
not impossible - to afford their monthly mortgage payments. Easy
credit during the housing boom allowed people to get into homes
that they otherwise couldn't afford. Eventually problems spread
from the subprime market to a broader array of more creditworthy
borrowers.
"The turmoil in financial markets clearly was triggered by a
dramatic weakening of underwriting standards for U.S. subprime
mortgages, beginning in late 2004 and extending into early 2007,"
the president's working group concluded. "But the loosening of
credit standards and terms in the subprime market was symptomatic
of a much broader erosion of market discipline on the standards and
terms of loans to households and businesses," the group said.
Paulson said market difficulties - like the one currently being
endured - often expose weaknesses that can be overcome with
experience.
"That experience often comes from lesson learned from prior
challenges and prior mistakes," he said.