The trouble with the Paulson plan

“This is a private sector effort, involving no government money,” Hank Paulson, US Treasury secretary, said last week, announcing the deal he had just brokered among representatives of mortgage-security investors and mortgage-service companies to freeze interest-rate resets on some loans. He emphasised that the compact was voluntary. “The industry standards announced today do not change the nature of responsibilities in the servicing industry – servicers will continue to modify loans when it is in the best interests of investors.” In short, he said, it is a “market-based approach”.

Give the man some credit for using that term without laughing. Is there a housing-finance market on the planet that is more pervasively manipulated and distorted by government than that of the US – even before this latest intervention?

Start with virtually unlimited tax relief on mortgage debt. Throw in the two giant “providers of liquidity”, Fannie Mae and Freddie Mac, key enablers of the mortgage securitisation surge, operating in the background under implicit government guarantee, with transactions accounting for 40 per cent of US mortgages on their books. Do not forget the Federal Housing Administration, the government mortgage insurer (6m loans and counting), which the administration has just asked to take on a much expanded role. And now this.

Totting up the explicit and implicit cost of these programmes, the mind reels. The tax deduction alone is nearly $80bn a year. It is a little late for a market-based approach.

You can read the rest of this new column for the FT here.