Some people bought homes they could never hope to afford. And modifying their mortgage is not going to help them, it's not going to be good for investors. These loan modification programs are designed to be very targeted, to help those homeowners who want to, and can fundamentally afford a reasonable mortgage. The analysis that we've done suggests that those type of loan modifications are, in fact, in the interests of the aggregate of investors. Now, there may be some investors, depending where they sit in the capital structure, they may prefer a foreclosure, okay? But the investors in the aggregate -- if someone can afford to make a reasonable payment, that is better for the investors in the aggregate. So, we've designed this on the front end, to take investors' views into account.
The interesting thing, though, is -- some of the minority investors who, let's say, prefer foreclosure, are very loud. Right? And they squeal a lot, and they threaten servicers, and they say, "Don't you dare modify those loans. Put them into foreclosure, or we're going to sue you." And so by getting the industry to move at once, and getting the federal government to come in and support a view of helping targeted homeowners who want to stay in their homes, where it's in the investors' collective interest -- we think that's striking the right balance, and stopping short of abrogating contracts.
Questioner: Getting back to the stress tests a bit. When we talk about what the assumptions were for the worst-case scenarios, some of the things that I've read have kind of put us -- potentially not beyond that, but certainly on a path to go quite far beyond what was originally predicted as sort of the worst-case stress scenario. And I'm wondering, you know, is there a plan C? What happens if employment exceeds 8.9%, and real estate doesn't find a bottom, and the commercial real estate problem is much larger than -- you know, it's kind of an unknown right now. You know, 1.8 million sub-prime mortgages almost brought the banking structure to its knees, and we've got 8.1 million alt-As starting to reset at the end of this year. What's the case beyond the stress test case, and where do you see that bringing us as a country?
Kashkari: It's interesting, because there certainly are some commentators who say the stress test was not pessimistic enough. But a lot of the banks say, "Are you kidding me? This was far more aggressive than what we think is credible," given what they're seeing in their loan portfolios. So, I don't think you're going to ever make everybody happy. I think the Treasury and the regulators tried to find the right balance. The biggest risk we now face is political risk. If the economy stabilizes the way the optimists think it will, where we could see GDP growth as early as Q4, bottoming some time this year, I think we're going to be fine because I think that that vicious cycle will be broken and it will start to unwind. And the programs that we have in place will be appropriate, given the economic fundamentals.
If the economy deteriorates much, much further than we expect, then I think we may need to go back to Congress to get additional authorities to stabilize the financial sector, and to continue to get lending going again. And that's going to be tough. Because right now, the political environment is so bad, almost every member of Congress is saying, "Don't come anywhere near us right now, asking for more authority." I certainly hope it doesn't come to that. And again, many economists don't think it will come to that. If the recession gets much, much worse, the American people will feel it. And that's why we did this. We did this for American families. And members of Congress will feel it. And they will hear it from their constituents. Again, I was very skeptical in the two years I was in Washington, at Congress's willingness to move, and take unpopular action that was necessary. But look what they did. When the people spoke, and when we faced the crisis in the fall, they acted in just two weeks. If the economy gets substantially worse, I think Congress will need to act, and they will act.
Questioner: Is there a point at which it's not better to keep putting money into the banking system? Or is that always the right answer?
Kashkari: I mean, I guess the question is, if we don't do it -- credit is -- people describe credit as the lifeblood of our economy. If we are not able to provide credit, if our financial system is not functioning, we will have a deeper, longer recession than we need to have. And that's the choice we have to ask ourselves. Do we want to -- even as distasteful as this is, would we rather have a longer, deeper recession? I think most people would say no.
Questioner: Two quick questions. The first one is, Americans have been encouraged by the Administration to go off, refinance, take advantage of the lower interest rates. The problem is, as you alluded to earlier, appraisals come in lower. There's been a decline in home prices. So effectively, it's kind of two-sided. You can get better rates, but you have to pump more money into your property to maintain those rates. I'm wondering what if anything should be done about that? The second question is, I saw your interview on Charlie Rose. I thought it was great. I'm just curious why you left government, and what you're planning to do next.
Kashkari: So, the first question is about underwater borrowers, which has gotten a lot of attention. You know, for -- in August of 2007 -- so, I'd been at Treasury for a year. Secretary Paulson asked me to lead the Department's work on housing. So I looked at -- with the Department, and with the Fed, dozens and dozens of homeowner programs. Housing programs, foreclosure programs. And the issue of what to do about people who are underwater is a really tough issue. Because when people get way underwater, they may not want to stay in their house any more. So I always talk about wanting to help people who want to keep their home. Okay? If you're underwater, and you don't want to keep your home -- people like to do this analysis. Let's say you call up your bank, and you said, "Hey, look. I'm underwater. If you don't cut my principal, reduce my mortgage balance, I'm going to walk, and you're going to have a foreclosure." That seems like that's a bad trade for the bank. The bank should cut your principal, because maybe they're only going to get 60 cents on the dollar in foreclosure.
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