US Treasury Secretary Henry Paulson said US regulators plan to alter rules for packaging loans into bonds in the aftermath of the subprime-credit collapse, Bloomberg reports.
Paulson and Federal Reserve Chairman Ben S. Bernanke want markets to stabilise, reducing borrowing costs for companies and consumers.
Paulson, Bernanke and their counterparts at the Securities & Exchange Commission and Commodity Futures Trading Commission are reviewing loan securitizations. The process magnified losses on subprime mortgage-linked securities because it reduced the incentive for lenders to ensure that borrowers could repay their debts.
“You can’t have gone through the process we’ve gone through without knowing there needs to be some changes. First, we need to get through this period with as little impact as possible on our economy. And then secondly, we need a strong policy response,” says Paulson.
Paulson predicts that it will be “a number of months” before the four-member President’s Working Group on Financial Markets announces its recommendations on securitized loans. The group, which advises the White House, consists of Paulson, Bernanke, Cox and CFTC Chairman Walter Lukken.
Most subprime mortgages, those aimed at borrowers with poor credit, were packaged into bonds. Those securities were then often repackaged into investments known as collateralized debt obligations.
Many of the securities were given top credit ratings by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, reducing the incentive for investors to research the asset quality of the underlying loans.
The SEC says it may propose rules requiring credit-rating companies to tell investors how successful their past assessments of debt quality have been.
The SEC has opened about three dozen investigations into whether companies, including lenders, underwriters and consulting firms, violated securities laws amid the subprime boom and the market’s subsequent collapse.
While bank funding costs have declined, “there are a number of the credit markets that aren’t functioning as normal,” says Paulson. He cited high-risk, high-yield bonds, structured credit and mortgages greater than $417,000, which haven’t been eligible for purchase by Fannie Mae and Freddie Mac, the largest sources of US home-loan financing.
The $168 billion stimulus package enacted by President George W. Bush will increase gross domestic product by 0.6% to 0.7% this year, adds Paulson. He told lawmakers that the measures, including tax rebates and incentives for business investment, will also add 500,000 jobs.