Washington is in high gear again, after a long hot summer, immersed in talks about how to deal with the current mortgage dilemma. The latest round this week involved the Congress and some of the key players in the government, like the Fed chief Bernanke and Treasury Secretary Paulson.
The flavor seems to be that lawmakers are under serious pressure from the public and special interest groups to legislate a lot to help homeowners in trouble. On the other hand, the government and the lending industry favor a less interventionist approach, the basic preference being to rely more on the marketplace to nurse itself back into good health. I think we need a little bit of both.
One crucial point to come up in this week's hearings was that troubled borrowers should definitely call their lenders to discuss possible solutions to their difficulties. As it stands now, 50% of foreclosures take place with the homeowners never contacting the lenders. That is a bothersome figure and you wonder why is it so? Besides that, lately the banks have been calling delinquent borrowers to offer help and seldom do the calls get returned. Another puzzling development.
Lawmakers are also eager to increase the limits on the loans Fannie Mae and Freddie Mac, the so-called government-sponsored enterprises or GSEs, can purchase on the secondary market. Supposedly that'll ease pressure on homeowners in distress. But Bernanke urges caution on this, saying that as more mortgages will enjoy government backing, making them virtually risk-free, that in turn will erode market discipline. And he's right. Lenders would continue acting with less than proper oversight on their loan portfolios since there is very little to worry about. If such a change is enacted to improve market liquidity, Bernanke would prefer it to be only temporary.
While the decision makers over in Washington are seriously tackling the current lending issues, we in the field hope they don't overreact and make matters worse.