"The Trouble with Paulson's Plan"

Clive Crook argues that while it may seem like the Paulson plan for subprime borrowers is a political winner for the administration, that may not prove to be the case if problems continue to mount:

The trouble with the Paulson plan, by Clive Crook, Commentary, Financial Times:

“This is a private sector effort, involving no government money,” Hank Paulson, US Treasury secretary, said ... announcing the deal he had just brokered ... to freeze interest-rate resets on some loans. He emphasised that the compact was voluntary. ... In short, he said, it is a “market-based approach”.

Give the man some credit for using that term without laughing. ... Alphonso Jackson, secretary of housing and urban development, was less circumspect than Mr Paulson. “Today’s announcement is of national and global import,” he began. “As we move into midwinter, when the chill of the season often silences the hope in our hearts, these actions today will warm the hearts of Americans caught in the swirling subprime crisis.” That is how you sell a policy. ...

What does this heart-warming, globally significant, limited and strictly voluntary agreement to serve the interests of investors in mortgage-backed securities actually do? ... The complex deal proposes to freeze the resets on some ... loans, and offers help for some borrowers in switching to more affordable (often FHA guaranteed) loans.

This could have been done, and to some degree would have been, without Treasury involvement... The real point of the agreement is to lay out a standard approach to modifications that would have happened piecemeal – a template that can be widely applied, easing some of the administrative burden that case-by-case renegotiation... Crucially, the consensual aspect of the plan is intended to minimise the litigation risk...

An evidently reluctant Mr Paulson took fright at the gathering storm and decided that he had to act. The unavoidable consequence is that the administration now owns the problem in a way it did not before. As the housing slump worsens, as it seems bound to, and a chill once more silences the hope in voters’ hearts, the measures announced so far will be deemed (even more than they have been already) unfair and inadequate. ...

From now on, every mortgage foreclosure will be seen as proof of the policy’s failure – and partly the administration’s fault. ...