Clash over Helping Trubled Homeowners
FDIC head wants more rescue funds to help block mortgage foreclosures
WASHINGTON (MarketWatch) - A simmering closed-door debate between top government officials over the priorities of the government’s financial market rescue package spilled out into public on Tuesday.
Treasury Secretary Henry Paulson and Federal Deposit Insurance Corp. Chairwoman Sheila Bair clashed in public over whether to use some of the $700 billion package to aid homeowners at risk of foreclosure. Bair on Friday unveiled a $24.4 billion proposal aimed at modifying 1.5 billion mortgages to avoid foreclosures, however Paulson said he would not pay for it as part of the $700 billion bank Troubled Asset Relief Plan plan.
“The root cause of the current economic crisis [is] the failure to deal effectively with unaffordable loans and unnecessary foreclosures,” Bair said to lawmakers at a House Financial Services Committee TARP oversight hearing.
‘The root cause of the current economic crisis [is] the failure to deal effectively with unaffordable loans and unnecessary foreclosures.’
— Sheila Bair, FDIC chairwoman
She noted that the rescue package approved by Congress “specifically provides” Paulson with the power to use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.
Instead, Paulson said he is sticking with his plan to use the first half of the allocated government capital, $350 billion, to buy significant minority stakes in large, mid-sized and small financial institutions. This approach is starkly different from Paulson’s initial strategy in September to use the capital to buy illiquid mortgage backed securities. Paulson said he changed the approach as market realities changed with it.
“Although we are not planning to initiate another capital program beyond those already announced, an emphasis on capital seems to us to be the better strategy going forward,” Paulson told lawmakers. “Congress passed legislation to deal with financial instability, and that is what we are doing.”
He said the best way to turn around the weak housing market was to “increase access to lower cost mortgage lending.”
He argued that the government takeover of Fannie Mae
was an important step in that direction.
Paulson said Thursday he plans to let the Obama administration decide how to allocate the second half of the government purchase plan capital.
House Financial Services Committee chairman Barney Frank said he was supportive of Bair’s approach and he wanted to see some capital from the bank bailout fund used to help mortgage owners avoid foreclosure. “Some of this tarp money has to be used for mortgage foreclosure prevention,” Frank said
House Financial Services Committee ranking member Spencer Bachus, R-Ala. indicated he was less frustrated with Paulson’s capital injection approach. But he also raised concerns about how the bank bailout hasn’t seemed to help borrowers. “We need to strengthen economy to restore lending and borrowers, that hasn’t worked well,” Bachus said.
Overall, Paulson and Federal Reserve Chairman Ben Bernanke defended on Tuesday their stewardship of the $700 billion financial market rescue plan. “A lot of it still hasn’t gone out to the banks. I think we’ve turned the corner in terms of stabilizing the markets and banks, but we will see restoration to lending” Paulson said.
Paulson said that there was “no playbook” for the Bush administration to follow and so strategy had to be adjusted. He said the financial markets would be worse off if Congress had not approved the package.
Bernanke said he saw some improvements in credit markets, but said overall conditions remain “far from normal.”
Bair has already schedule to adopt a Temporary Liquidity Guarantee Program rule on Friday that would seek to unlock inter-bank credit markets and “restore rationality to the credit markets.”
Bair’s proposal would guarantee new, unsecured debt issued by banks, thrifts and bank holding companies issued between Oct. 14 and June 30. According to her proposal, debt issued cannot exceed 125% of senior unsecured debt that was outstanding as of Sept. 30 and scheduled to mature before June 30. The program provides insurance coverage for deposits typically used by corporations for payroll expenses.
In addition to Frank, other Democratic lawmakers have expressed support for Bair’s mortgage foreclosure prevention approach. “Everybody agreed at that time that sub-prime meltdown was at the epicenter of this situation,” said Rep. Maxine Waters, D-Calif. 