U.S. economy strong despite subprime problems, Bush says

Last Updated: Friday, August 31, 2007 | 5:37 PM ET

CBC News

U.S. President George W. Bush is not overly worried about the financial impact of the subprime mortgage problems, but on Friday announced measures to help individual homeowners facing foreclosure.

The subprime problems "are modest in relation to the size of our economy," he said. Financial markets are adjusting to the problems, and that will continue for some time, but the economy is not at risk.

U.S. President George Bush, accompanied by U.S. Treasury Secretary Henry Paulson, right, and Housing Secretary Alphonso Jackson, says subprime mortgage problems are 'modest' compared to the size of the U.S. economy.
(Ron Edmonds/Associated Press)

The situation for individual homeowners with subprime mortgages who face foreclosure is different, so the government plans to help them.

As previously revealed by officials to certain media outlets on Thursday, the Federal Housing Administration will allow more people to get government-insured mortgages, Bush said.

He also encouraged lenders to renegotiate subprime mortgages with borrowers, encouraged Congress to pass a bill reforming the FHA and said lenders will have to disclose more about mortgages.

But there will be no help for lenders or borrowers who acted unwisely.

"It's not the government's job to bail out speculators" or people who knowingly borrowed more than they could afford to buy houses.

Bush's address was the second talk Friday on the subprime problem.

Earlier in the morning, Federal Reserve chairman Ben Bernanke said the U.S. monetary regulator is prepared to take further action to backstop financial markets, but won't bail out investors who made bad bets.

After easing credit in mid-August in response to market pressures, "the Federal Reserve stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets," he said in the text of a speech.

But "it is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions."

Bernanke did not say what, if anything, the Fed plans to do. But given the turmoil in the U.S. housing and world financial markets, he said the data the Fed usually monitors is too old.

Analysts hope the Fed will cut its key interest rate on or before its next scheduled meeting, on Sept. 18. The rate is now at 5.25 per cent.

"Consequently, we will pay particularly close attention to the timeliest indicators," he said.

Markets open higher

Stock markets opened sharply higher Friday on hope that Bernanke and Bush would provide some relief to housing markets.

The markets held on to those gains through the day. The Dow Jones industrial average jumped 119 points to end the week at 13,357, while the S&P/TSX composite index soared 216 points to close at 13,660.

The markets want relief from the problems caused by a sharp rise in foreclosures — more than 500,000 so far this year — after lenders made loans in past years to borrowers who were poor credit risks.

Bernanke acknowledged the depth of the problem. Slower residential construction has cut U.S. economic growth about three-quarters of a percentage point over the past 18 months, and there is a backlog of unsold homes, "suggesting that further declines in homebuilding are likely."

The foreclosures, concentrated among subprime borrowers renewing adjustable rate mortgages, have reduced the value of packages of mortgages sold to investors. Problems in the subprime market have triggered bankruptcies among mortgage lenders, and spilled over into stock and credit markets.

"Delinquencies among this class of mortgages are likely to rise further," Bernanke said.

Both Bush and Bernanke blamed part of the problem on lenders.

"Unfortunately, there have also been some excesses in the lending industry," Bush said. Bernanke said there has been "slippage in underwriting standards, reflected for example in high loan-to-value ratios and incomplete documentation."

Subprime mortgages are a particular problem because many borrowers were attracted by low initial interest rates later renewed at higher rates, and that has led to the increased foreclosures.

On the investment side, the subprime mortgages were packaged and sold to investors, but as foreclosures increased, they fell in value.