Regulators Are Right to Act on Mortgage Mess

It is clear that the financial crisis that began in the U.S. housing market and the derivatives tied to it has metastasized well beyond it, but it remains in the forefront of policy makers' concerns. And for good reason: Home ownership in the U.S. reached almost 70% before the recent surge in foreclosures. An estimated 1% of homeowners were in some stage of foreclosure proceedings at the start of the year.

The Bush administration has launched several initiatives to help relieve the pressure on American homeowners, including the Hope Now private-sector effort to minimize foreclosures. Nevertheless, as foreclosure rates rise, political and economic pressure mounts to do more.

Debt forgiveness is not something one often hears from policy makers, who often eschew efforts to escape the discipline of market forces. It is something reserved for the highly indebted countries or something associated anti-capitalist leftists. Yet this is exactly what several senior U.S. policy makers are advocating.

Federal Reserve Chairman Benjamin Bernanke, Director of the Office of Thrift Supervision John Reich and Chairwoman of the Federal Deposit Insurance Corporation Sheila Bair all are advocating that mortgage lenders should do more about writing down the principal.

Bernanke, who enjoys arguably the greatest degree of insulation from political forces, was explicit: "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquencies and foreclosures" than the current efforts by the government and private sector.

This represents a clear evolution of his thinking. A year ago, he was trying to reassure the market that the subprime problems were contained. He initially proposed tighter regulation to stop abusive lending practices. Even as recently as late February, the Federal Reserve advised pursuing prudent loan workouts through modifying mortgage terms and deferring payouts.

Other Remedies

In contrast to Bernanke et al. in moving to including principal as part efforts to stabilize the housing market, Treasury Secretary Hank Paulson continues to emphasize renegotiation of interest rates. Indeed, while the heads of the Fed, FDIC and OTS are concerned that house values falling below mortgage values pose serious problems, Paulson seems nonchalant. On March 3, Paulson told a Bloomberg Television audience that "almost too much" has been made out of concerns for homeowners whose house prices have fallen below their mortgages.

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Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.