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Bush, Bernanke Tackle Subprime Crisis

By Mike Peacock,

Reuters

Posted: 2007-08-31 06:54:55

LONDON (Aug. 31) - U.S. President George W. Bush will outline reforms on Friday to help struggling subprime mortgage borrowers and his central bank chief will deliver a speech which will be pored over for hints of a looming rate cut.

Federal Reserve Chairman Ben Bernanke speaks on "Housing and Monetary Policy" at around 10:00 a.m. EDT.

Bush, who will make a statement at the White House an hour later, will announce assistance for homeowners with subprime mortgages to avoid default via changes to the tax code.

"He will also discuss reform efforts to prevent these kinds of problems from arising in the future," a senior U.S. administration official said.

Massive problems with U.S. home loans, stemming from aggressive lending to mainly poor people who have been squeezed as interest rates climbed, have fostered a liquidity crisis around the globe as banks have scrambled to calculate their exposure to the sector.

The risk of a credit squeeze arising from mass mortgage defaults has also raised the prospect of U.S. consumers trimming spending at a rate that could tip the world's largest economy into recession.

Investors have been pinning their hopes on an interest rate cut by the Fed, at its next meeting on September 18, to shore up the U.S. economy and stop the sickness spreading.

Bernanke reiterated on Wednesday the Fed was "prepared to act as needed" to ensure credit market problems do not adversely affect the economy, fuelling speculation the central bank will lower its benchmark federal funds rate from 5.25 percent.

But experts have said the Fed is in no rush to act as it wants to disabuse investors of the idea that it is there to bail out their poor decisions.

"The market is betting on Ben Bernanke coming up with clear-cut statements that if the crisis intensifies he will reduce base rates," said Heino Ruland, a strategist with German brokerage Steubing.

"But with the Bush administration stepping in, he will be less forced to do so. If it's a combined effort, then that's a reason to be bullish," he said.

European shares rose early on Friday, mirroring a broad rally in Asia as investor hopes mounted for dual action from the Federal Reserve and the U.S. government.

Bush will press for legislation giving the Federal Housing Administration flexibility to help subprime borrowers, including the power to guarantee loans for people at least 90 days behind in mortgage payments to help them avoid foreclosure, the Wall Street Journal reported.

The agency was founded in the 1930s Depression to tackle mass homelessness. Now its mission is to foster home ownership by insuring mortgage loans, especially for poorer Americans.

JAPANESE JOINT EFFORT

Japanese market turmoil sparked by the subprime crisis should be addressed by a joint effort by the Bank of Japan, the Ministry of Finance and the Financial Services Agency, Tokyo's new financial services minister said.

Yoshimi Watanabe, who took over as head of financial services earlier this week, also said he was not yet worried the problems would directly hamper Japan's financial system.

Japanese Finance Minister Fukushiro Nukaga said he had been told by U.S. Treasury Secretary Henry Paulson global economic fundamentals were strong, but that it may take some time for adjustments in markets to take place. (ID:nTKU002851)

International Monetary Fund First Deputy Managing Director John Lipsky highlighted ongoing risks, saying market turmoil would dent but not derail world growth, but that it was too soon to declare the troubles over. (ID:nN30196823)

"Central bank action so far has been appropriate but market turbulence has not fully receded," Lipsky told Reuters in an interview on the sidelines of a gathering of top international central bankers and economists in Jackson Hole, Wyoming.

It is there that Bernanke will speak later.

There were fresh signs around the world that the liquidity crisis was far from over.

Australia's central bank struggled to ease upward pressure on some market interest rates as renewed trouble in the global commercial paper market has made institutions reluctant to lend (ID:nSYD939).

Publisher McGraw-Hill Cos Inc (MHP.N) said it was replacing the president of Standard & Poor's, the company's financial services division, amid questions about the role of credit-rating agencies in the mortgage crisis.

And Britain's Barclays Plc (BARC.L) turned to the Bank of England as the lender of last resort for the second time this month after at technical breakdown in the British clearing system, a source close to the matter said.

The BoE supplied almost 1.6 billion pounds ($3.2 billion) this week in its third largest loan this year as lender of last resort, but did not name the borrower or borrowers.

Barclays declined to confirm it had used the borrowing facility but said in a statement it was "flush with liquidity." Its shares rose 1.2 percent early on Friday.

Copyright 2008 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. All active hyperlinks have been inserted by AOL.

2007-08-31 06:27:29

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21 comments

holifieldcol 11:24:00 AM Aug 31 2007

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This is just one more step in helping people that are living way above thier means. I live in the state of Mississppi and I know several families that live in very nice homes and are steady wanting bigger and better homes to keep up with everyone else, or stay ahead of them. At the same time these families have their children on a state funded heath insurance called CHIPS because they can't afford insurance. Yet they live in $200,000.00 or more homes. The honest hardworking people that are not trying to keep up or live above their means are the ones that will end up paying in some form or fashion for these people that can not afford their home mortgae. Instead of getting help with their mortgage, let them get a smaller, simpler home that they can afford. Shoot, who would not want to live in a large, nice home if they could get assistance in paying for it. If it is good for the ones that got themselves into this postition then offer it to everyone.
If I could not make my mortga

rhymn001 09:58:56 AM Aug 31 2007

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There should be no bail out of these greedy lenders or the deadbeat borrowers. Let the market correct itself, and let the mortgage industry get back to sound underwriting policy as well as double checking appraised values of homes that will be mortgaged.

The socialistic tendencies of acting as Godfather to underqualified borrowers and insane lenders is capitalistic heresy.

rhymn001 09:58:55 AM Aug 31 2007

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rhymn001 09:58:54 AM Aug 31 2007

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wsidberry 09:39:07 AM Aug 31 2007

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The problem: The person wants to buy a home. They make only $42,000 a year. Their credit is terrible. They may have even filed for bankruptcy within the past three years. A subprime lender loans them the money to get into a $280,000.00 home that is worth $150,000.00 with an interest rate of 19%. These type of loans should have never been made in the first place; and who is going to be stuck with paying for this mess? You and me. Have you heard of the Resolution Trust Corporation? This is the government organization that was set-up during Ronald Reagon's administration to bail-out the savings and loans industry. You and I are still paying for this debacle to this day. And you and I ,the tax paying public, will be taxed to pay for this subprime lending mess.

JRobert783 09:02:16 AM Aug 31 2007

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Unfortunetly, many of the problems we are having now are past problems. Most Mortgage professionals esspecially the bad ones are out of business. The ones that focused on doing solid honest business are being beat up just like everyone else. Almost every Subprime lender even the good solid ones are hurting becuase of the preditors that messed the marlet up over two years ago. I agree the 2 or 3 year arms were a gamble however at the time it saved the client maybe 500 bucks a month and got them approved most of the time to payoff credit cards and toys. Again I ask where the credit card companies in all of this. If the bankruptcy laws weren't changed last year I can guarantee you we'd be in a bigger fix as many borrowers would have walked 6 to 12 months ago. Welcome to Calcuta USA.

mrd12271 08:51:35 AM Aug 31 2007

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While I agree with most of what you folks are saying, i.e., living beyond your means, there are other factors involved. Many lenders, particularly in the "subprime" market, are preying on these people and not properly explaining the possible consequences of taking, probably, the largest loan they will ever take. Like, "Hey, in two or three years, your mortgage could increase $500. Will you be able to pay it?" If the answer is "yes", well, their on their own. Borrower uncertainty at that point is the lenders problem if they approve the loan. If all is properly laid out, then we can begin to separate the irresponsible from predatory lending. If you don't know what your doing, use a lawyer who could explain worst case scenarios.

wabele8310 08:37:53 AM Aug 31 2007

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LIKE PEOPLE AREN'T WORKING HARD FOR THEIR MONEY ONLY TO HAVE IT TAKEN FROM THE MIDDLE AND LOW INCOME PEOPLE TO SUPPORT CORPORATE WELFARE AND BILLIONAIRES CAMPAIGN CONTRIBUTIONS TO THE GREEDY OVERCOMPENSATED PARASITES AKA GOP! GET REAL IF YOU THINK PEOPLE AREN'T WORKING TWO AND THREE JOBS TO HOLD THEIR HEADS ABOVE WATER THEN YOU ARE OVERPRIVILEGED AND IN NEED OF A TASTE OF REALITY. MORE MONEY GOES TO CORPORATE WELFARE THAN INDIVIDUALS WHO ARE IN NEED.

Zimmy, typing in caps does not make it true. First of all, there is corporate welfare. However, there is a lot of support in this country for making allowances for those that live well above their means.
It is a hard, cold fact that bad things happen to good people all the time. It is not the government's fault to bail folks out who make bad choices however.