$800-bn plan to help people with high-cost mortgages stay in their homes
US Treasury Secretary Henry Paulson is sending a financial-rescue plan worth about $800 billion to Congress as Democrats prepare to turn it into a vehicle to help people with high-cost mortgages stay in their homes.
The Treasury will run the programme to take on illiquid mortgage-related debt, with the Federal Reserve consulting on its design, officials said. Treasury aides are spending the weekend with Congressional staff to negotiate a compromise that the House and Senate can vote on next week.
Paulson, Fed Chairman Ben S Bernanke and other regulators are eager to stop a contagion of credit risk that has toppled three financial giants and forced one into a merger as capital flight began to squeeze Wall Street. Democrats are indicating they want to target relief for households by restructuring loans of struggling borrowers.
“We’re going to be buying up a lot of mortgage paper,” said House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat. “Between Fannie Mae and Freddie now owned by the federal government and the mortgage paper we’ll be acquiring here” and the Federal Deposit Insurance Corp running failed bank IndyMac Bancorp Inc, “we should now be able substantially to reduce foreclosures,” he said.
Frank said the Treasury was due to present the plan to lawmakers late yesterday.
The programme may be worth about $800 billion, split into $50 billion tranches, said four people briefed on drafts of the Treasury’s proposal who spoke on condition of anonymity because details haven’t been finalised. The funds, which would last for at least two years, will likely accept mortgage-backed securities and collateralised debt obligations, they said.
The Treasury plans to hire asset managers to purchase the assets through so-called reverse auctions, seeking the lowest prices, one of the people said. Congress will need to raise the limit for the federal debt to allow the government to borrow enough to fund the programme, the person said.
Republicans warned against turning bailout into an agenda.
“Congress and the administration must keep this plan as simple and straightforward as possible,” said John Boehner, the leading Republican in the House. “Loading it up to score political points or fit a partisan agenda will only delay the economic stability that families, seniors, and small businesses deserve.” Last resort
The Treasury is stepping up as the buyer of last resort for mortgage-linked assets that few other financial institutions in the world want to buy. To avoid giving a direct subsidy to Wall Street, officials must structure the fund so taxpayers either get fees, a high rate of interest, or some participation in the full recovery of the assets.
“Illiquid assets are choking off the flow of credit that is so vitally important to our economy,” Paulson said yesterday at a press conference in Washington. “As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.”
Senator Richard Shelby, an Alabama Republican who has advocated that markets should be allowed to penalise bad bets, warned that bailout could saddle taxpayers with large debts.
“This could be the biggest bailout in the history of the country and could ultimately cost $500 billion to $1 trillion,” Shelby, the ranking Republican on the Senate Banking Committee, said in a Bloomberg Television interview yesterday. “Congress is not going to rubber stamp something.” Delinquencies Soar
Nearly one-in-10 American mortgages is delinquent or in foreclosure. The government would be buying debt backstopped by the US home values that have been falling in value for eight consecutive quarters, according to the S&P Case-Shiller US Home Price Index.
Senator Christopher Dodd, the Banking Committee chairman, said the plan’s framers should consider the full debt load of US consumers, possibly including credit cards.
“We” have “got some strong concerns about what’s included here,” said Dodd, a Connecticut Democrat. “They haven’t limited this conversation exclusively to residential mortgages. So I know that other securitised debt is also going to be considered.”
Investors are unlikely to tolerate partisan wrangling and brinksmanship. US stocks surged in the biggest two-day global rally in history as talk of the plan began to circulate September 18.
The House will pass legislation to implement the plan by the end of next week, and the Senate will act soon after, Frank said yesterday in an interview on Bloomberg Television.
