Steel downplays government’s role in ‘superfund’ aimed at calming markets

A wave of defaults on sub-prime mortgages has been roiling financial markets since late summer, toppling the chief executives of two Wall Street behemoths. Over the next 18 months, low teaser rates on roughly 2 million sub-prime loans are due to expire, raising the risk of a tsunami of foreclosures that could throw the economy into recession.

As the top adviser to Treasury Secretary Henry Paulson on domestic finance, Robert Steel says that the administration’s focus is keeping people in their homes. He cited Hope Now, a new alliance of 11 large mortgage servicers to provide counseling and outreach to borrowers who may be facing foreclosure.

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The White House is also backing legislation to modernize the Federal Housing Administration (FHA) and beef up the regulator for Fannie Mae and Freddie Mac, collectively known as government-sponsored enterprises (GSEs).

Steel argues that these measures, along with legislation to adjust the tax code to reduce the burden on homeowners able to renegotiate their mortgages, will go a long way toward helping troubled borrowers.  

The former vice chairman of investment bank Goldman Sachs, Steel has been the key administration official involved in corralling a group of Wall Street banks to set up a $100 billion fund to stabilize the credit markets.

Treasury’s support of the fund, known as the superfund, has been controversial. Some critics say that it creates the potential for moral hazard. Others believe the fund will flop if investors perceive it as a bailout for big banks that have a lot of exposure to mortgage-banked securities. Steel argued that Treasury’s involvement with the superfund has been exaggerated.

Q:  What was Treasury’s role in creating the superfund?
A: We organized the meetings of the market participants. We brought people together, and from the people coming together came lots of ideas. We didn’t bring the people together with an idea; we brought them together to get their ideas. I think that’s an important distinction.

Q:  Is this a government bailout?
A: I don’t know how anyone could characterize it as a bailout. There’s no federal money and there’s no federal organization. We were the original convener and now the market participants are off developing a strategy themselves.

Q:  Can you explain why Treasury got involved rather than allowing the private sector to work through the mortgage problems on its own?
A: We’re focused on having markets be orderly and liquid. And as markets began to recover in August, an area that seemed to recover more slowly was asset-backed commercial paper. And asset-backed commercial paper’s important. It really is the short-term securitized assets for student loans, credit cards, automobiles and mortgage-backed securities. So wanting that market to work well and be orderly should be a good priority for well-functioning capital markets. To the extent that the market participants could come together with a strategy to help that happen, that seemed like a good thing.

Q:  Do you have a sense for when the superfund will be up and running?
A: Secretary Paulson has said he’d like to have this done by the end of this year. So I agree with Secretary Paulson.

Q:  What will Treasury’s role be once it’s up and running?
A: No role.

Q:  Are you going to be developing other ideas for dealing with the turmoil in the credit markets in the coming months?
A: Our view is that the economy will benefit when the markets are working well, and market participants — both investors and institutions — should be a part of that discussion. We’ll be vigilant in terms of monitoring those situations.

Q:  Could lifting the GSEs’ temporary portfolio caps help keep people in their homes?
A: The size of the portfolios is a function of the safety and soundness regulator. And OFHEO [the Office of Federal Housing Enterprise Oversight] should make those decisions based upon safety and soundness, not in response to lobbying by anybody. It’s not about politics or profits. This is about people, and we should be focused on helping people.
We shouldn’t be adjusting the mandate without a comprehensive perspective in making sure that the regulator has all the tools they need in order to work with the GSEs. Today the GSE regulator has tools less than a standard bank regulator. Our view is that they should have those tools plus, given the nature of the mandate and the responsibilities the GSEs have.

Q:  The legislation sponsored by Sen. Charles Schumer (D-N.Y.) and House Financial Services Committee Chairman Barney Frank (D-Mass.) would lift the GSEs’ temporary portfolio caps, while mandating that 85 percent of the added flexibility be used to buy renegotiated sub-prime loans. Does the administration oppose that idea?
A: I think the issue for us is comprehensive reform. Let’s see what it looks like and we’ll be glad to respond to it. We’ve worked hard with Chairman Frank on this issue and feel good about the progress that’s been made. And the devil’s in the details. But we’ve worked collaboratively and I think the administration has shown some flexibility on lots of different perspectives here.

Q:  In your view, did any of the regulators that oversee mortgage originators fall short in any way, helping to create the current problems in the market?

A: I think in many ways the housing markets in the United States have been the envy of people all over the world. We have very attractive home ownership rates. In the last 10 years, people who previously did not have access to credit were able to get access to credit, get their foot on that first rung of the ladder so as to have access to credit, buying homes and all the constructive effects of homeownership. Regulators have been a good part of this, but there’s always room for improvement. We shouldn’t just accept the status quo; we should always be trying to do better. When you’ve looked at the work the regulators have done — they’ve issued several statements about how they view these issues and about how they should be dealt with, and I think they’re on the case.

Q:  So far lenders have renegotiated the terms for only a small portion of sub-prime loans. Should the Congress or the administration be doing anything to help them make more progress on this front, or do you not really see a role for the federal government there?

A: The focus of this administration and Treasury is helping as many people as possible and appropriate to stay in their homes. We initiated several very specific programs and we’ve asked for help from Congress on three or four specific issues. We’ll have to be flexible. And I do believe that, given the size and number of potential resets, that we’ll need to have a standardized and systematic approach to deal with the volume and complexity that is coming at us and that we will be developing in the months ahead.