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Treasury Secretary Henry Paulson was questioned at a House Financial Services Committee hearing on Tuesday about why he did not use the first half of the $700 bailout money approved by Congress in September to buy back delinquent loans from banks and avert further foreclosures, which were among the original objectives of the plan when it was approved.
In the Treasury’s original proposal, it was explained to the legislators that buying back bad loans would infuse fresh capital into banks to enable them to offer new loans and eventually stimulate the housing market and the economy. Instead, Paulson spent the money to buy shares in financial institutions.
Paulson insisted that the bailout plan was not intended as a cure-all solution for the country’s economic difficulties, adding that the money would be more maximized if it is invested in financial institutions to stabilize the financial system.
Representative Barney Frank, head of the committee, rebuked Paulson, telling him that the foreclosure option was included in the bailout program approved by Congress.
In response, Paulson explained he had not totally rejected using bailout money to help homeowners avoid foreclosure, but related he had doubts about the scheme proposed by the Federal Deposit Insurance Corp.
The FDIC’s plan requires the Treasury to provide credit and loan guarantees and to bear a portion of the cost of bad loans so that mortgage lenders could offer loan restructuring options to troubled homeowners.
With the FDIC plan, about one-and-a-half million foreclosures would be prevented, according to FDIC Chairman Sheila Bair. Bair warned that about four to five million units would become foreclosure homes over the next couple of years if the federal government does not directly help the homeowners.
Federal Reserve Chairman Ben Bernanke also had reservations about the FDIC foreclosure plan, mainly because of the cost, but nevertheless, endorsed the plan because it would be run by mortgage banks rather than government units.
HUD Fair Housing Equal Opportunity