Mortgage Situation ‘Requires Legislation,’ Frank Says

Paulson’s comments on the new direction for the financial bailout, made during an update on Treasury’s Troubled Asset Relief Program (TARP), marked the first time the Bush administration has openly acknowledged that asset purchases were no longer a viable solution to the economic crisis. Treasury has shifted its focus direct cash infusions to financial institutions, in return for a government equity stake, and other measures.

“Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets,” Paulson said. “Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.”

Most lawmakers have not objected to Treasury’s new focus, though some have questioned how the department is implementing the other measures and whether the asset-buying idea will ever be revived.

In a Wednesday afternoon conference call, Sen. Charles E. Schumer commended the shift, but noted that its necessity had taken far too long to recognize.

“It’s not that they make mistakes in the beginning, it’s that they come off those mistakes more quickly because we’re all in a brave new world here,” Schumer, D-N.Y., told reporters in response to Paulson’s announcement.

But other lawmakers were troubled by the shift in emphasis.

“When you see so many changes, you wonder if they really know what they’re doing,” said Charles E. Grassley of Iowa, the top Republican on the Senate Finance Committee. “The administration and congressional leadership were so confident when they brought this to the members. Changing direction like this may be completely legal, but it certainly raises some questions as to if they have a handle on how bad the situation really is. Just as important is Congress’ need to conduct vigorous oversight, despite Treasury changing the plan for stabilization.”

Paulson said the program was adjusted to meet the economic crisis and strenuously denied misleading lawmakers about the nature of the $700 billion bailout when Congress was debating it.

“As the situation worsened, the facts changed,” he told reporters. “The thing I’m grateful for is we were prescient enough, and Congress was, that we got a wide array of authorities and tools in this legislation. I will never apologize for changing an approach or strategy when the facts change. . . . I think we moved quickly and we moved powerfully to address the situation as it exists now.”

Paulson also outlined three “critical priorities” in the weeks ahead, including providing more capital to banks; securitizing credit outside the banking system, including student and auto loans; and reducing the risk of home foreclosures.

Foreclosure Mitigation

Lawmakers across Capitol Hill have been pressuring Paulson and TARP point man Neel Kashkari to force recipients of the federal capital injections to increase lending and step up foreclosure mitigation efforts.

On Tuesday, Kashkari, the interim assistant Treasury secretary for financial stability, joined the heads of federal housing agencies to announce efforts by mortgage-financing giants Fannie Mae and Freddie Mac to modify mortgages for borrowers facing foreclosure.

Mortgage Situation ‘Requires Legislation,’ Frank Says

But Sheila Bair , the chairwoman of the Federal Deposit Insurance Corporation, one of the leading voices supporting increased mitigation programs, panned the Fannie/Freddie program for not doing enough.

Bair and the FDIC have reportedly been negotiating with Treasury to create a $40 billion mitigation program based on the FDIC-run program at IndyMac Bancorp. Funds for the program would come out of the $700 billion at the Treasury’s disposal. After initial indications that the plan would be given the green light, there has been little sign recently that it will be put into effect.

Paulson said the FDIC had a “good plan,” but he did not give any hint as to whether the plan would be instituted.

Frank said lawmakers should consider using the second half of the $700 billion financial bailout to fund Bair’s new program.

“The secretary is saying ‘OK,’ to the Congress and the president-elect, ‘if you like Sheila Bair’s plan then help her pay for it,’” Frank said.

Senate Banking Committee Chairman Christopher J. Dodd expressed impatience with such an approach.

“I am concerned that we may have to wait until the next administration before we have the real change in economic policy that our nation needs, but it is my sincere hope that Secretary Paulson collaborates with Chairman Bair to get this program up and running as soon as possible,” said Dodd, D-Conn. “There is no legitimate reason why they would be unable to do so. Secretary Paulson should be as quick to realize that the foreclosure issue is critical to solving our problems as he was in realizing that equity purchases were necessary.”

But Frank also cautioned “it should be very clear, no matter what people have argued, there is, in my judgment, zero likelihood that federal taxpayer dollars will go to those who hold loans that never should have been made in the first place.”

Paulson did not address any specific legislative plans and continued to maintain that Treasury has been prodding banks to increase their efforts to renegotiate troubled mortgages. “Ordering is too strong, but we’ve been encouraging,” he said.

However, he reiterated that the focus remains on the health of financial institutions.

“The top priority has to be stability, making sure we have the resources in reserve to deal with any systemic events and make sure that we’ve got capital to put in institutions,” he said. “That has to be the No. 1 priority.”