Government Testing Ways to Avoid Foreclosures, Says HUD Secretary Preston
October 2008
STANFORD GRADUATE SCHOOL OF BUSINESS — In the wake of the recent turmoil in the financial and housing markets, U.S. Secretary of Housing and Urban Development Steven Preston offered an eager Stanford audience an insider’s perspective on how bad our economic problems are likely to get, and what the government is doing about it. While we may be facing “a time in history like no other,” he said, the current chaos poses opportunities for business and government to step back, assess what’s really going on, and solve problems in ways that have not been attempted before.
“The basic belief of economic theorists that markets are efficient and knowable has proven to be wrong,” admitted Preston, a University of Chicago MBA who has spent most of his career on Wall Street. Disasters such as the two million home mortgage foreclosures this year alone demonstrate just how wrong the system can go.
Focusing on audience questions at the Stanford Graduate School of Business, Preston blamed the fall of the subprime mortgage market on both irresponsible behavior on the part of borrowers who entered into mortgages they couldn’t afford, as well as “predatory lending” on the part of financial institutions. The biggest culprit, he said, has been the private sector, which sold subprime loans without government support. Federally backed enterprises such as Fannie Mae and Freddie Mac, whose mission has been to help people gain access to home financing, were not the source of the problem, he said.
Now, however, the Federal Housing Authority is scrambling to reverse the trend. In cases of foreclosure, the agency is working with lenders to modify their loans to make them affordable to borrowers. A new $400 million government package also is providing counseling to help borrowers better understand mortgages and better manage their finances. “Almost everyone we work with keeps their home,” Preston reported, noting that some one million potential foreclosures have been salvaged.
But things may get worse before they get better. “With more than 12 million people under water with their mortgages, more loan resets to come, and bad times in the economy, the government is going to have to get aggressive in implementing new programs and policies,” he said. Part of the challenge, he observed, will be to avoid policy changes that are “too inclusive.”
“You don’t want to provide incentives for people to come to government programs who actually can afford to pay their loans. So we must be cautious about our plans.”
Preston said that public decision makers currently are faced with huge policy questions, such as whether the government should take sweeping measures to alter millions of loans in one swoop. While such a solution may be more efficient than dealing with foreclosures on a case-by-case basis, it will, he notes, come with “inevitable costs.”
Despite the specter of such massive headaches, Preston told the audience, composed primarily of MBA students, of the benefits of entering into public service, particularly as a business professional, and particularly in these challenging times. “It’s wonderful to come into a role like this and know that all the experience you’ve accumulated can be brought to bear to help people in our country,” he said. “You can affect millions of people’s lives in positive ways.”
The talk was part of the Business School's View From the Top speaker series organized by the Center for Leadership Development and Research.
— Marguerite Rigoglioso