20 September 2007

Testimony Paulson on recent events in the credit and mortgage markets

In a testimony held before the House Committee on Financial Services Treasury Secretary Henry Paulson presented the Treasury Department's perspective on the recent events in the credit and mortgage markets and their impact upon consumers and the economy. With the current credit market reappraisal which started in the subprime mortgage market the performance of subprime mortgages deteriorated, as a result of higher than expected delinquencies and defaults, Paulson explained. “This introduced greater uncertainty regarding both the future prospects of subprime mortgage-backed securities and the methodologies the credit rating agencies used to rate these securities”, he continued.

According to Paulson the recent reappraisal of risk could result in some modest penalty to economic growth. “But in my view the underlying strength of the economy should allow for continued growth”, he said.

Paulson sees the significant amount of hybrid adjustable rate mortgages that will be resetting in the next few years as a key challenge in the current subprime mortgage market.

“As we consider new legislative proposals for enhanced or simplified disclosures, we should be fully aware of the efforts that are currently underway to improve disclosures”, Paulson said. “The Federal Reserve is engaged in a comprehensive review of the disclosure regime underlying the Truth in Lending Act, with the goal of developing disclosures that more effectively help consumers understand their loan terms.”

The PWG has already begun reviewing four important issues, Paulson noted. These are:

- financial institutions' liquidity, market and credit risk practices, including treatment of complex credit products and conduits;

- accounting and valuation procedures for financial derivative instruments, particularly for complex, narrowly traded products that become difficult to price in times of stress;

- basic supervisory oversight principles for regulated financial entities, especially given exposures to off-balance sheet, contingent claims; and

- the role of credit rating agencies in evaluating structured finance products.

The Financial Stability Forum (FSF) – a body of finance ministries, central banks and regulatory bodies from leading financial centers created after the Asian financial crisis – to also examine these issues.

Full testimony

© Graham Bishop