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JEFFREY BROWN: And we get two outside assessments of this plan and what other action should or should not be taken to deal with the subprime troubles.

Michael Calhoun is the president of the Center for Responsible Lending, a homeowner and consumer advocacy group. And Andy Laperriere is a managing director of the International Strategy and Investment group, known as ISI. His firm does research for large investors, including hedge funds and pension funds.

Welcome to both of you.

Lets start with a response to this plan. Ill start with you, Michael Calhoun. Does it do enough, in your opinion?

MICHAEL CALHOUN, President, Center for Responsible Lending: This plan will help in small ways, but does not at all take care of the crisis that we have now. Its a crisis not just for families who have subprime mortgages, but it is impacting in a big way all families who are homeowners and the economy as a whole. And if we want to get through this, this is a small step in the right direction, but much, much more is needed.

JEFFREY BROWN: We heard Secretary Paulson refer to 1.2 million, I think, people he thinks would be eligible for refinancing possibly. What are your numbers? What do you think would be the number of people qualifying for the freeze that hes talking about?

MICHAEL CALHOUN: Weve looked at the numbers, and there are a lot of qualifications that you have to meet to be eligible for one of these continuations of your interest rate.

Our numbers are much smaller, somewhere about 145,000 families is our estimate of who might benefit from this continuation of their existing mortgage rates, which are no bargain rates. Most of these rates are 8 to 9 percent. So its not like these homeowners who continue at that rate are getting some discount mortgage rate.

JEFFREY BROWN: Andy Laperriere, a response to the plan, overall response?

ANDY LAPERRIERE, Managing Director, ISI: Well, I think that theres two things going on. First thing, I think mainly what Secretary Paulson talked about, which is youre trying to replicate what a case-by-case modification would produce, because the resources arent there to do a case-by-case modification.

But I think theres a concern, also, that theres some shifting of losses going on from homeowners to investors, and thats what investors on Wall Street are watching. Is this going to shift losses from homeowners to investors? And I think theres a little bit of that going on in here, as well.

JEFFREY BROWN: How does this affect the equation of winners and losers, borrowers versus investors?

ANDY LAPERRIERE: Well, I think the concern that investors are going to have looking at it closely is that there are people who are going to qualify for these loans that arent very good candidates for loan modification in the absence of these standards, that they may have very high debt-to-incomes. There may be a big risk to default eventually. And the longer that it takes to go into foreclosure, the greater the losses will be for those investors.

Private sector initiative

Michael Calhoun

Center for Responsible Lending

The typical family who got a subprime loan was not out speculating on some investment property. The typical subprime loan is a borrower simply refinancing their existing home to help pay off some credit card debts, get money for tuition.

JEFFREY BROWN: Now, Secretary Paulson in the interview and in the press conference today, he said several times, This is a private sector initiative. Why was that so important? And explain the distinction.

I’ll start with you, Mike Calhoun. Why do you think he was emphasizing that? And do you want to see more government involvement, more action?

MICHAEL CALHOUN: I think he was careful to characterize it that way. There have been a few suggestions that there should be some sort of — public bailout has been the pejorative term. Should the government put taxpayer dollars involved?

I don’t think there are a lot of serious proposals for that, because that bails out both lenders, who did bad lending, and some folks feel like, Well, this is helping another family on its mortgage. Nobody’s helping me.

I think his important point, though, is that this crisis was created largely by bad lending practices that were at the time very profitable for the lending industry. The typical family who got a subprime loan was not out speculating on some investment property. The typical subprime loan is a borrower simply refinancing their existing home to help pay off some credit card debts, get money for tuition, deal with medical bills.

And they ended up in this exotic loan product that had this built-in payment increase that virtually no one can absorb. A typical subprime borrower would see their payments go from like $1,500 to $2,200 a month, even with no change in market interest rates. And that’s why we’re seeing all these foreclosures, and that’s why the crisis is here.

JEFFREY BROWN: And that’s why the number of resets, as he calls them, the adjusting of the rates, is going to hit so much in the coming year?

MICHAEL CALHOUN: Yes, the resets aren’t that market rates have changed. It’s that these loans typically had an interest rate of 8 percent to 9 percent for the first two to three years, and then, at that point, the interest rate jumped up to 11.5 percent to 12 percent. There’s just not many families who can absorb either that increase or that high a mortgage interest rate.

Concerns over borrower bailout

Andrew LaPerriere

ISI Group

I think things are going to get worse, and I think you’re going to hear calls for a taxpayer bailout to mitigate the economic fallout from this subprime, and actually it’s, I think, bigger than a subprime problem.

JEFFREY BROWN: Andy Laperriere, you wrote an op-ed the other day that you — it was called, No Bailouts for Borrowers. Now, explain that. What is the fear here? And this, I think, goes to what Secretary Paulson in his emphasis on private sector versus the government.

ANDY LAPERRIERE: Well, I think the concern is that, however well intentioned this proposal may be, it’s not going to really do very much. I think we actually both agree on that, because the problem is much larger even in the resets.

Most of the subprime loans that are delinquent today have not reset, the overwhelming majority. So the worst-performing loans are the 2006, the 2007 loans, none of which have reset. So the problem is many of these borrowers cannot afford the current payment.

So I think things are going to get worse, and I think you’re going to hear calls for a taxpayer bailout to mitigate the economic fallout from this subprime, and actually it’s, I think, bigger than a subprime problem. It goes to people with good credit scores who’ve also gotten imprudent loans.

So I think, as you hear those calls, I was trying to make the argument that a taxpayer bailout would be unfair. I don’t think it would really solve the problem and mitigate the economic fallout very much. I think it would set a bad precedent.

JEFFREY BROWN: What does it do, in terms of — does it change the market incentives? Is that the fear of a bailout?

ANDY LAPERRIERE: Well, I think if you go back and say, Why are we in this position? I think that a lot of people took risky gambles because interest rates were low, and I think the Fed kept them artificially low for too long. And people were engaging in risky behavior.

And we ended up getting basically a bubble, and now we’re in the bust part of the boom-bust. And to the extent that you go in and bail out people who’ve made either irresponsible or not prudent decisions, you encourage that kind of behavior in the future.

And we don’t want boom-bust. They’re painful. There are a lot of people who are innocent who are going to suffer from this. We don’t want it to happen again, so we don’t want to bail out people who made bad decisions or else we’re just going to see more of this behavior in the future.

Congressional bankruptcy reform

Michael Calhoun

Center for Responsible Lending

Under current law, if a family is forced to file bankruptcy — for example, if they face foreclosure — the bankruptcy court is prohibited from modifying their mortgage loan, even though in bankruptcy the court has authority to modify most other loans.

JEFFREY BROWN: And Secretary Paulson was referring to various initiatives in Congress, one of them involving reforming bankruptcy laws. He didn’t say it clearly, but it didn’t sound like he is in favor of that. You do think there’s some changes that need to be made?

MICHAEL CALHOUN: Under current law, if a family is forced to file bankruptcy — for example, if they face foreclosure — the bankruptcy court is prohibited from modifying their mortgage loan, even though in bankruptcy the court has authority to modify most other loans, including other loans secured by land, real property, investment houses even.

Moody’s has estimated that a change in the bankruptcy code that would allow the court to modify those loans would save over half-a-million foreclosures in this current crisis. We think that’s both a fair approach and a more effective approach.

I think the key — and there was a story in the Wall Street Journal about this report — that half of the families who ended up with these subprime loans qualified for a prime loan. They should have gotten fixed-rate loans at a lower interest rate than what they have in these subprime loans, but they were pushed by brokers and lenders, who got paid more for selling them these subprime loans, than they would have been paid for putting them in a regular, 30-year, fixed-rate loan, that would have avoided the crisis for these families and this bigger crisis for the whole economy.

JEFFREY BROWN: It sounds to me like you’re worried that if this goes to Congress, these kinds of things, it gets into the political process, that it can take us down a road that could be worse?

ANDY LAPERRIERE: Right. Well, I think Mike’s right that a lot of that did happen, and I think the investors should bear losses for buying those loans.

The concern is, if you change the rules midway through the game, you’re going to have investors who are potential lenders in the future say, Well, if things get tough and people start losing their homes, then they’re just going to hand the losses over to investors. So I don’t want to be in that market. And then you step back.

We’re already in the midst of a pretty deep credit crunch that I think is just beginning. The concern is, if you go too far — and I think Mike and I were talking earlier, I think he agrees with this — you go too far, you get people who pull back. The credit crunch gets worse.

JEFFREY BROWN: OK. We’re going to leave it there. Thank you both very much.

ANDY LAPERRIERE: Thank you.

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