Conductor Extraordinaire: Hank Paulson (United States Secretary of the Treasury and ex-CEO at Goldman Sachs)

Henry Paulson presses for aid to sub-prime lenders
Suzy Jagger in New York

Henry Paulson, the US Treasury Secretary, is seeking to persuade the White House to offer financial compensation to American mortgage lenders that try to help troubled homeowners by renegotiating the terms of their loans.
The Times has learnt that Mr Paulson is lobbying President Bush to provide funds so that mortgage lenders can reduce the loss that they would incur from either reducing the rate of an adjustable home loan or extending the life of the mortgage to make it cheaper for the property owner.
It is understood that Mr Paulson’s proposals are meeting significant resistance within Washington, where it is perceived that such a move would be a bank bail-out scheme.
Washington is nervous about being seen to be preventing Wall Street companies from having to face the financial implications of their own lax lending practices and ill-judged investment decisions.
America is suffering its worst housing recession for 16 years. Mortgage arrears and foreclosures have soared as homeowners have struggled to keep up with their mortgage repayments.
A number of those homeowners — who typically have low incomes and poor credit histories — took out sub-prime mortgages that begin with a low introductory interest rate but which increase in their cost throughout the life of the loan.
Sub-prime borrowers bet that by the time the interest rate rises, the value of their home will have appreciated sufficiently to allow them to remortgage. Unfortunately, the housing slowdown has seen some states suffer house price falls of 40 per cent.
In the summer, President Bush sought to avert a deepening mortgage crisis and reduce the number of Americans who faced losing their homes. He urged mortgage lenders to contact borrowers and try to renegotiate the terms of their mortgages.
Earlier this week, Countrywide, America’s biggest mortgage lender, said it would begin contacting borrowers and modify $16 billion (£7.8 billion) worth of home loans whose interest rate will reset by the end of 2008.
David Sambol, Countrywide president and chief operating officer, said: “We are determined to assist borrowers who have the willingness and wherewithal to remain in their homes but need a little help to do it.”
It is expected that other mortgage lenders will follow suit, even though the cost of negotiating the terms of sub-prime mortgages will eat into their profits.
It is understood that Mr Paulson wants to offer the lenders compensation to offset these losses.
Chris Whalen, of Institutional Risk Analytics, said: “Paulson can’t go there. Paulson wouldn’t just be trying to help the banks, he would be trying to help the dealers, Wall Street as a whole. Ultimately, it’s the investors who take the hit.”
Mr Whalen added: “It is wrong for the Government to try to mandate loan modification. It sounds brutal, but a lot of these families should not have got mortgages in the first place. They couldn’t afford them. Modifying the loan in a number of cases won’t work. Historically, 30 to 40 per cent of borrowers whose loans are modified default again.”

The US Treasury and Countrywide failed to return calls yesterday.