High-yield/macroeconomics (fka YIELD)

[rfj1862]

Subprime lending crisis-the Economist's take on GWB's measures

http://www.economist.com/world/na/displaystory.cfm?story_id=9748077

WHEN the American president heads for his White House Rose Garden, you know something big is up. On Friday August 31st George Bush made his way out there to launch a package of measures aimed at America's subprime mortgage-lending crisis. A rising tide of defaults among borrowers with shaky credit histories has, thanks to the way that their debts have been securitised and sold on globally, triggered chaos in the world's credit markets as asset-holders struggle to re-evaluate their risk. But Mr Bush's intervention was aimed not so much at the turbulent markets but at the original borrowers.

The reasons for this are political, not economic. The fate of America's struggling homeowners has become a hot electoral issue, and the Democrats have been cleaning up on it. The main contenders for the presidency have all excoriated the administration for failing to protect the little guy from the consequences of his borrowing.

Hillary Clinton, the Democratic front-runner, has compared the subprime crisis to the terrible savings-and-loans scandals of the early 1980s, and demanded action to protect borrowers and to police lenders. Now, with Congress about to return from its summer recess next week and the 2008 election cycle beginning in true earnest, the president appears to be acting to try and neutralise mortgages as a political issue that could add to the Republicans' woes next year.

Mr Bush plans to allow more people to tap into federally funded insurance schemes. But only if they can show that they have fallen behind with their interest payments because of interest-rate rises. This is the situation of many people who took out short-term fixed-rate mortgages which are starting to expire and will now attract sharply increased payments because interest rates have increased in the interval. In July, the foreclosure rate was almost double what it was a year ago, according to RealtyTrac, which follows the property market. He also proposes to improve the tax position of individuals who renegotiate their mortgages with their creditors, which can now expose them to a unwelcome tax liability.

Mr Bush also announced a foreclosure-avoidance initiative that will encourage various bodies, including Fannie Mae and Freddie Mac, government-sponsored mortgage lenders, to help homeowners avoid insolvency. And he chipped in with other plans to improve financial literacy. A large part of the problem has resulted from people being lured into loans that they cannot afford. Opaque and complicated mortgage products offered seductively low initial rates that soon leaped up. Mr Bush had little to say about what might be done to improve these matters. The Democrats will be sure to dismiss all this as far too little, and rather too late.

One reason for the president's caution on helping borrowers or lenders is that he was being careful to avoid anything that smacks of the b-word. Announcing his plan to help homeowners, Mr Bush said that “the government's got a role to play—but it is limited…It's not the government's job to bail out speculators or those who made the decision to buy a home they couldn't afford.''

Beyond promising that a Treasury panel would look into the whole question of the securitisation of mortgages, he said nothing much aimed at the wider credit markets. But solace for the markets did come from another source though. The chairman of the Federal Reserve, Ben Bernanke, pledged that the Fed is ready to take "additional actions as needed" to provide liquidity to the markets.