The full impact of the upheaval in financial markets “has yet to play out,” a top administration official said Wednesday, while stressing that the effect will be dampened somewhat by solid economic growth.
Robert Steel, Treasury undersecretary for domestic finance, appeared before a House committee as the worst housing slump in 16 years and roller coaster financial markets cast a shadow on the economy.
“What we have is a severe lack of investor confidence,” said Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. He said he hopes that Congress and the administration will work together on solutions for the mortgage squeeze.
Stocks fell sharply Wednesday morning, as a nervous Wall Street digested a report showing a large drop in pending home sales. The Dow Jones industrial average dropped about 160 points in morning trading.
In prepared testimony, Steel told lawmakers, “This process is far from over. ... The ultimate impact of these events on the economy has yet to play out.”
The House Financial Services Committee was examining how people might be affected by the market turbulence, five days after President Bush put forward a plan to help struggling borrowers keep their homes amid rising foreclosures.
Frank has said he agrees with some elements of the White House proposal. Changes being proposed by Frank and other Democrats go further, however, and the Democratic-controlled Congress is expected to expand the proposals in coming weeks in response to voters’ growing anxiety.
An estimated 2 million adjustable-rate mortgages are scheduled to “reset” this year and next, jumping from low “teaser” rates for the first two or three years to much steeper rates that could cost borrowers their homes. The wave of resets could crest during the presidential and congressional election campaigns next year, and the issue already has brought politically tinged debate over possible responses by the government.
Rep. Carolyn Maloney, D-N.Y., called the administration plan “an important first step” but added, “it is not enough.”
The plan unveiled Friday at the White House would make it easier for borrowers now holding adjustable-rate mortgages to refinance those loans using the resources of the Federal Housing Administration, a Depression-era agency created to help low- and moderate-income Americans afford homes.
Under the Bush proposal, an estimated 60,000 homeowners who have fallen behind on payments because their mortgages have reset would be able to refinance with FHA-insured loans. That marks a significant change because FHA is not now permitted to insure refinanced loans from borrowers who are currently delinquent.
Defaults have spiked in recent months on high-risk subprime mortgages, loans that were extended to borrowers with weak credit histories. The rising tide of soured loans forced a number of lenders into bankruptcy, while hedge fund and other big investors in securities backed by subprime mortgages took deep financial hits.
The turmoil spilled over into global credit markets in recent weeks as investors faced the prospect of not being repaid. Credit tightened, even for more creditworthy borrowers. Stock markets around the globe gyrated wildly and key market indexes were knocked down. The Federal Reserve and other central banks swooped into the markets, pumping tens of billions of dollars into the financial system to help banks and other institutions get through the credit crunch and continue to make loans.
Bush insisted on Friday that the economy was strong and could weather the market turbulence.
The tighter access to credit, making it harder for consumers and businesses to borrow, has raised anxiety that the economy could be hurt.
In keeping with its promise to aid the markets as needed, the Federal Reserve on Tuesday added a relatively modest $5 billion to the banking system through a repurchase agreement. And further bolstering the argument for an interest-rate cut, Fed directors, in minutes released Tuesday from three discount rate meetings from July 9 to Aug. 6, said a contracting U.S. housing market posed a risk to growth.
Also Tuesday, the Fed and other banking regulators issued special guidelines urging loan service companies to work with borrowers in danger of defaulting on their home mortgages.