Bush's Compassionately Conservative Subprime Fix

The growing mortgage mess forces the White House to act.

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Plenty of homeowners—especially those who saved up for big down payments so they could get a low-rate fixed mortgage—have little sympathy for their fellow Americans who gambled on subprime loans and the teaser rates that often came with them. And they might be rolling their eyes at news that Hank Paulson and his Treasury Department are nudging the mortgage industry—as Arnold Schwarzenegger has done in California—to voluntarily refrain from resetting some $400 billion worth of subprime adjustable-rate mortgages when the teaser rates expire next year.

But they should not be surprised. Consider this: Three of the four states with the highest number of foreclosures in October were potential 2008 swing states: Florida, Ohio, and Michigan. The political pressure to do something big and not wait for some reform of the Federal Housing Administration was becoming overwhelming. The Democratic-controlled U.S. House and Senate have certainly been working on a fix. For instance, presidential candidate and Senate Banking Chairman Chris Dodd has a bill to let judges restructure mortgages while in bankruptcy proceedings—a bill the industry vehemently opposes.

The White House had to act. In a way, this is President Bush's compassionate-conservative approach to the mortgage crisis. It doesn't take the hardhearted "moral hazard" approach and allow homeowners who can afford their current mortgages to lose their homes when their loans reset. Yet it doesn't bail everybody out, either. Homeowners who can afford the reset—though it might be painful—as well as those who can't even afford their current teaser rate are probably out of luck.

And the Bush effort falls well short of some more expansive ideas, such as having the government buy up all the bad subprime debt. Nor is it some bureaucratic mandate manufactured in Washington. The move may be part of an effective one-two push along with further rate cuts from the Federal Reserve, the likelihood of which increased not only with Fed Chairman Ben Bernanke's speech last night but also with disappointing personal income data that came out today. As economist Mark Vitner at Wachovia puts it:

This week's full percentage point upward revision to third-quarter real GDP growth would seem to have indicated that the economy was weathering the credit crunch. Unfortunately, that earlier strength did not carry over into the current quarter. ... That said, real personal consumption expenditures now appear to be on course to rise at between a 1.0 percent and 1.5 percent annual rate, which would likely produce real GDP growth in the 1.5 percent range [in the fourth quarter.] Growth in early 2008 may be even slower than that. Given the extent of the slowdown, we believe the Fed now has the green light to cut 50 basis points at the December 11 meeting.