Treasury secretary's caution, banks' action may be right mix

Posted Thursday, October 18, 2007

When the U.S. treasury secretary calls the current housing decline "the most significant current risk to our economy," despite strong economic fundamentals, it's time to take notice in a very deliberate way.

Secretary Henry Paulson's blunt assessment on Tuesday casts a shadow on lingering hopes that the subprime mortgage crisis that roiled Wall Street this summer is being confined to one sector of the American economy.

He recognized this when he said, "The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."

The overwhelming concern is for the record-breaking rate of owner-occupied housing foreclosures across the country.

With the prospect of 2 million mortgages with low introductory rates scheduled to reset at much higher rates in the coming 18 months, state and local governments would be reckless to ignore Mr. Paulson's assessment.

In Delaware foreclosure filings rose 15.5 percent last month compared with a year earlier, bringing the total filings for the state up 32.7 percent for the first quarter of the fiscal year.

While offering his sobering assessment, Mr. Paulson cautioned against clumsy intervention from Washington. He warned Congress about rushing in to save everyone.

For the moment, his warnings are on target. Credit practices must be adjusted. More transparency, for example, is needed. But such reforms must be cautious.

Meanwhile, several of the country's biggest banks, with federal prodding, are coming together to create a giant mortgage pool that could bolster the credit markets.

The mechanism being worked out to buy the securities of what are called special investment vehicles, holders of $400 billion in assets, could prevent a market meltdown.

It's a delicate task. Mr. Paulson's words can be seen in one light as whistling in the dark and the banks' actions can be viewed as stopgap measures. But, along with other prudent actions by lenders, such as renegotiating some mortgages, Mr. Paulson's talk and the banks' pool could help stabilize the situation.

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