Months into the subprime meltdown, economists and policymakers in the US seem no closer to agreement about what, if anything, to do. Last week Hank Paulson, Treasury secretary, and Ben Bernanke, Federal Reserve chairman, were at odds over how to stem mortgage foreclosures. Mr Bernanke called on banks to be more willing to reduce principal. Mr Paulson said voluntary adjustments to mortgage rates and payment schedules were working.
For the moment, both men are merely exhorting – moral suasion, it used to be called. Mr Bernanke is not yet proposing that banks should be compelled to write down loans, and Mr Paulson notes that voluntary writedowns are among the options his “Hope Now” alliance of mortgage lenders and servicers can choose if they wish. Still, the tone of their comments was different. Whether he means to or not, Mr Bernanke continues to signal mounting alarm at the economy’s prospects.
As well he might. February saw the biggest drop in non-farm payrolls for five years – 65,000, more than twice what the market expected. In the fourth quarter of 2007, more than 2 per cent of the country’s 46m mortgages were in foreclosure, and nearly 6 per cent past due date – both sharply higher than a year ago. For subprime mortgages, the numbers were 13 per cent in foreclosure and 20 per cent past due. House prices have much further to fall – maybe another 20 per cent, analysts say. That will drive many more borrowers into negative equity and force the pace of foreclosures still higher.