Bailout revamp would restore original purpose: housing help

McClatchy NewspapersJanuary 9, 2009 

WASHINGTON — Democrats on Friday revealed a planned revamp of last year's $700 billion Wall Street bailout, promising to steer more money to smaller lenders and troubled homeowners, and pledging tougher oversight.

The legislation will move first through the House Financial Services Committee, and Chairman Barney Frank, D-Mass., wants any recipient of new bailout money to report every three months on how much its lending has increased or decreased and why. He also proposes a number other of tougher reporting and accountability requirements and limits on executive compensation.

To restore the original purpose of the bailout — to help cure housing-sector problems — the proposal would require that at least $50 billion of remaining funds be used to reduce the record number of mortgage delinquencies and foreclosures. The bill directs the Treasury Department to provide a plan to address the housing crisis by April 1.

Lenders gave mixed reviews to Frank's plan. They liked some provisions and criticized others.

"Chairman Frank's legislative outline contains positive proposals to assist troubled homeowners and prevent foreclosures," Steve Bartlett, president of the Financial Services Roundtable, which represents more than 100 major lenders, said in a statement.

The roundtable welcomed provisions that provide more protection from lawsuits to mortgage servicers, but it opposed language that would make some of the tougher executive compensation provisions retroactive to the original recipients of the bailout money.

The initial bailout has been criticized because of a perception that banks simply aren't lending the money they've been given. Originally, the Bush administration said it would use the rescue package to purchase distressed mortgages and thus boost bank balance sheets.

By late last year, however, the administration changed course and said it would instead inject money into banks. It used most of the first $350 billion of the bailout money to that end and later used some of it to support U.S. automakers, which were on the verge of filing for bankruptcy.

A congressionally appointed panel charged with overseeing the bailout issued a scathing report Friday, criticizing the Bush administration for doing little to account for how the rescue money is actually being spent. Harvard law professor Elizabeth Warren, who heads the five-person bailout oversight panel, told CNBC Friday that the administration had failed to create a workable plan.

"It's about transparency, it's about accountability, it's about whether money is going to mortgages as the statute requires, and ultimately it's about do they have a strategy," Warren said, concluding the answer is no. "The question is did they sit on their hands and not do what Congress requires them do to."

The Bush administration decided to leave to President-elect Barack Obama the determination on how to spend second $350 billion of the Wall Street bailout funds. His pick for treasury secretary, Timothy Geithner, has been holed up with others on the Obama transition team working on plans to revamp the bailout fund, called the Troubled Asset Relief Program, or TARP.

Obama aides confirm that Geithner is weighing the creation of a new office within Treasury to manage the TARP. That suggests that the government is likely to be deeply involved in the affairs of banks and other businesses for some time to come — much as it was during the Great Depression.

Lawmakers are moving quickly, too. The plan prepared by Frank, expected to be introduced next week, would require future TARP recipients to say how they'll use the money and requires regulators to verify that lenders are using the money in the ways they've promised.

Frank's plan also would prohibit banks from using government money to purchase healthy institutions, which happened last year. It would require the Federal Reserve to evaluate compliance among non-financial institutions that received TARP money.

The legislation will impose on future recipients the tougher executive compensation provisions that were included in the December bailout of automakers. The top 25 executives in institutions receiving TARP money would be prohibited from collecting bonuses or other incentive-driven pay.

While the compensation provisions reflect public outrage over taxpayer support to banks that paid their top executives handsomely and lavished them with perks, the housing provisions of proposed TARP revamp are meatier.

For example, its directs the Treasury Department to give mortgage servicers — those who collect mortgages on behalf of investors — limited liability from lawsuits when they agree to modify a loan and authorizes payments to them for loan modifications.

While technical, the liability provision is important. Most mortgages are packaged with others and sold into a secondary market as a type of security. If 39 investors in this security agree to modify a loan but one disagrees, the mortgage servicer is open to a lawsuit from the dissenter. This provision could remove a major obstacle to stemming foreclosures.

In a break from the Bush administration, Frank's plan also would authorize the use of TARP funds for the purchase by the Treasury Department or the Federal Reserve of complex securities that are backed by pools of car loans, student loans or municipal bonds. These so-called asset-backed securities have been a key part of why Americans enjoyed cheap and easy access to finance, and with the credit markets seized up the purchase of these troubled assets could spark more lending to consumers.

The legislation also requires Treasury to create a program outside of the TARP to stimulate demand for home purchases, especially in areas with high rates of foreclosure. This provision could raise objections because it could involve government-subsidized mortgage rates.

As important as what's in the proposed legislation is what isn't.

Frank didn't include a provision to allow bankruptcy judges to modify the terms of mortgages. Key senators on Thursday announced an agreement with Citigroup on legislation that would allow bankruptcy judges to modify mortgage terms on primary residences, because judges can already do this on vacation homes and luxuries such as yacht purchases.

Mortgage bankers and other lenders staunchly oppose this, arguing it would create incentives for homeowners to not pay their mortgages and seek better terms from a judge.

The Securities Industry and Financial Markets Association, which represents a wide variety of lenders, issued a statement Friday opposing the Citigroup announcement.

The association said that letting judges rework mortgage terms "would have serious and negative consequences — increasing risk and uncertainty in an already challenging mortgage market and raising mortgage rates for future homeowners at a time when the availability of consumer credit is already severely constrained."

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