Will the "Real" Anti-Foreclosure Mr. Paulson Please Stand Up?

Yesterday's front page story in the Wall Street Journal was not the usual Paulson story about subprime mortgages---blah, blah Treasury Secretary Henry Paulson has organized mortgage companies to make blah, blah, blah unenforceable promises to offer short-term help to blah, blah homeowners. (Can you see that I share Prof. Elizabeth Warren's skepticism about the "Sandbag" plan?)

This story about Paulson and foreclosures was much more interesting. It profiled John Paulson (no relation), a hedge fund manager who bet big in 2005 that the mortgage market was heading sharply south. Paulson's take home pay in 2007 was reputedly $3 to $4 billion dollars (WOW!). What is he doing with all this money? Well, he's given $15 million of it to the Center for Responsible Lending to fund legal assistance to families facing foreclosure. This is a chunk of change, even for someone with his paycheck, and it is a momumental gift for direct legal services, which typically struggles along on small gifts. Another surprise--John Paulson says in the WSJ that "bankruptcy is the best way to keep homeowners in the home without costing the government any money." This bowled me over; a Wall Street maven backing the pending legislation that would let consumers modify their home mortgages in bankruptcy! I'd say this Paulson won't be making the speaker's list at the next Mortgage Bankers Association meeting, which has strenously opposed the legislation. They'll have to content themselves with the Treasury Secretary.

There are some cynical ways to view Paulson's actions. First, while he notes that he never made a subprime loan or even invested in that market (remember, he bet against it), he could still feel guilty. Every homeowner getting the boot translated to real dollars for his fund--and him as manager--as the value of the mortgage securities fell. Second, the WSJ speculated that, if enacted, the bankruptcy bill could reduce homeowners' payments to mortgage companies, rewarding Mr. Paulson's fund for betting that mortgage securities will take hit. (Paulson himself says such an effect is far from clear, and we've had prior debates on Credit Slips about whether the losses would be greater if these families didn't get this new form of bankruptcy relief).

John Paulson does go on the record saying that he "thinks a lot of homeowners have been victimized." And that's a lot more than much of Wall Street has been willing to admit so far.