U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke testified before Congress Thursday about their actions to circumvent a recession and halt the recent tide of mortgage foreclosures.
Their recent moves have included urging banks to renegotiate mortgages with homeowners deceived by adjustable rate mortgages, as well as slashing key interest rates that make it cheaper for banks to borrow money — and encourage lending to consumers.
The pair discussed the origins of the problems in the subprime-mortgage market with the House Financial Services Committee and offered possible legislative options to address the issue.
'My Feelings are Not Hurt'
President Bush, in a White House news conference, acknowledged "there is no question that there are some unsettling times in the housing market."
"The fundamentals of the nation's economy are strong. Inflation is down, job markets are steady, corporate profits appear to be strong and so are exports," he said, adding that he is "optimistic" about the U.S. economy. "But I would be pessimistic if Congress does what it wants to do and raises taxes."
Asked about recent comments by former Federal Reserve Chairman Alan Greenspan suggesting that the administration had been fiscally irresponsible, Mr. Bush said "my feelings are not hurt."
"I respectfully disagree with Alan Greenspan when he says we didn't handle the fiscal situation well, because we did," he said.
Rep. Barney Frank, the Massachusetts Democrat who chairs the committee, blames the Bush administration for restricting loan amounts that Fannie Mae and Freddie Mac can bundle into securities to $417,000. The government-chartered mortgage companies are the largest sources of money for American home loans.
However, Treasury Secretary Paulson signaled that the administration would consider allowing Fannie Mae and Freddie Mac to temporarily buy, bundle and sell as securities any loans exceeding $417,000, known as "jumbo" loans.
The idea, which represents a policy change for the administration, is portrayed as a way to inject liquidity into the overstretched mortgage market.
Foreclosures are at record highs and late payments are spiking. Lenders have been forced out of business and investors have taken huge financial hits.
Frank also accused the Fed of not being vigilant during the housing boom of the past few years.
Fed Moving to Aid Economy
But Bernanke offered fresh assurances that regulators would take steps to curb economic fallout related to the mortgage mess.
His comments come just two days after the Federal Reserve cut the key federal funds rate — charged on overnight loans between banks — by a half-percentage point to 4.75 percent in hopes of assisting the ailing the housing market and buoying the overall economy. It was the first time in more than four years the Fed cut this rate.
"Global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans," the Fed chairman said. The situation, he acknowledged, "has created significant market stress."
Bernanke promised lawmakers that the Fed will take steps to crack down on abusive or bad lending practices.
"The Federal Reserve takes responsible lending and consumer protection very seriously. Along with other federal and state agencies, we are responding to the subprime problems on a number of fronts," he said. "We are committed to preventing problems from recurring, while still preserving responsible subprime lending."
The Fed has taken a number of steps already and other proposals are being considered, Bernanke said.
Many consumers tend to dismiss the laborious disclosure statement in their mortgage agreement, mainly because they aren't written in terms that are easily understandable.
Paulson said that that information should be greatly simplified, especially on loans that adjust after the initial teaser rate, so that the information is clearer and more meaningful for consumers.
"Consumers have pages and pages of things to look so they think of (the disclosure statement) as boilerplate or the fine print," said Paulson. "The idea that I like is to have on every mortgage a one-page, very simple, big-print statement: 'Your mortgage is X dollars today and it can be Y dollars'" when it adjusts at another date.
With additional reporting from The Associated Press
Mr. Bush opened the news conference with a statement challenging Democrats on their proposal for a $35 billion increase in a children's health insurance program. The president has threatened to veto the bill.
The increase for the State Children's Health Insurance Program would bring total spending to about $60 billion, or twice the level sought by the administration.
The president urged lawmakers to send him a simple extension of the current program - which expires at the end of this month – if both sides cannot agree on terms of a new measure.
On the subject of Iraq, Mr. Bush said there has been progress in local communities in Iraq, but people are dissatisfied with the central government.
"Part of the reason why there's not this instant democracy in Iraq is because people are still recovering from Saddam Hussein's brutal rule. Sort of an interesting comment, I heard somebody say, `Where's Mandela?' Well, Mandela's dead because Saddam Hussein killed all the Mandelas."
In the testiest exchange in the news conference, the president refused to answer a question about Israel's alleged bombing raid in Syria. A reporter asked if Mr. Bush could comment on the target and whether he supported the attack.
After a short back and forth, the president said "I'm not going to comment on the matter means I'm not going to comment on the matter."
With additional reporting from The Associated Press