Congress Irked By Lack Of Help For Homeowners

Many members of Congress believe the $700 billion bailout plan should help homeowners facing foreclosure. Many lawmakers say the proposal bails out Wall Street but doesn't doing anything for Main Street.

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As Treasury Secretary Paulson tries to push through the emergency bailout plan, there are growing calls from both sides of the aisle to build in protection for homeowners facing foreclosure. NPR's Chris Arnold reports.

CHRIS ARNOLD: Many lawmakers say the Paulson plan bails out Wall Street without doing anything to help the millions of Americans who got the bad loans that the Wall Street firms were selling. Meanwhile, the foreclosure mess is dragging down the housing market and the economy. Senate Banking Committee Chairman Christopher Dodd questioned Secretary Paulson on this point.

Senator CHRISTOPHER DODD (Democrat, Connecticut; Chairman, Senate Banking Committee): Why didn't we include some mitigation for foreclosure as part of this? Not because we want to send a message that we care about Main Street, but because if we don't address that, bad mortgages out there are still going to be a lingering problem, and our ability to address this is going to be less.

Secretary HENRY PAULSON (Treasury Department): Mr. Chairman, thank you very much. As we thought about what is the best thing we could do...

ARNOLD: Paulson fell back on the administration's previous efforts to aid homeowners, but that may not convince lawmakers. Despite those earlier efforts, it looks like more than a million people are getting foreclosed on this year. That number keeps growing. And it wasn't just Democrats questioning Paulson. Richard Shelby is the ranking Republican on the banking committee.

Senator RICHARD SHELBY (Republican, Alabama): The plan does nothing to address the root cause of the crisis, the rising default rate on mortgages. While Wall Street banks get to sell their bad investments to the Treasury Department, homeowners will still be saddled with mortgages that they cannot afford.

ARNOLD: Obviously there are some homeowners you can't help, but there are many others facing foreclosure who have steady jobs. They just borrowed a little too much, or some got lied to about what their payments would be. But the industry is all tangled up. A senior manager at one major mortgage servicing company that we spoke to said, of the loans the firm managed that were on the verge of foreclosure, less than one percent were getting any kind of meaningful modification to help the homeowners. Henry Paulson asked for a bazooka to combat the financial crisis back when he sought authority to take over Fannie Mae and Freddie Mac, and now Democrats want to break out a bazooka of their own, a plan to change the bankruptcy law. Mike Calhoun is the president of the Center for Responsible Lending.

Mr. MICHAEL CALHOUN (President, Center for Responsible Lending): The bankruptcy courts are well set up to handle this. I mean, the bankruptcy court presently handles over a million families filing bankruptcy each year in this country.

ARNOLD: And when the courts do that for other types of loans, a bankruptcy judge can intervene and order a lender to modify a loan, say by lowering the interest rate. That way the borrower can afford it, and the creditor can keep collecting something. The court can do that for a mortgage on a second home, but not for a primary residence. Democrats want to change that.

Mr. CALHOUN: To allow courts to modify home mortgage loans in the same way that they modify other debts, it requires for the borrower to show that they can't afford their loan as it's currently structured, but with it being modified they could afford it.

ARNOLD: Ira Rheingold heads up the National Association of Consumer Advocates. He says, after all, the government is restructuring the debt of all these financial firms with this giant bailout.

Mr. IRA RHEINGOLD (Director, National Association of Consumer Advocates): It seems OK to restructure Wall Street firms and insurance companies, but it's not OK to allow American homeowners to go into bankruptcy to restructure their debt so they can actually keep their home? And in fact, if they can keep their home, that's the best solution for the American economy, because that would stabilize housing prices.

ARNOLD: But the financial services industry is fiercely opposed to any change in the bankruptcy law. Steve Bartlett is president of the Financial Services Roundtable, a big industry lobbying group.

Mr. STEVE BARTLETT (President, Financial Services Roundtable): Well, I think it's the wrong approach. If you put it in the hands of a bankruptcy judge, then you gum up the whole system for future homebuyers. And then people that should get credit in the future wouldn't be able to get it.

ARNOLD: Bartlett argues the change would mean higher risk for lenders, which would push up interest rates overall. It's hard to say whether that would actually happen. There's all kinds of things that affect interest rates. But if it did jack up rates, that would not be good for the housing market or the economy. And with that argument, the industry has defeated the bankruptcy proposal repeatedly in the past. But, Mike Calhoun says, maybe this time will be different.

Mr. CALHOUN: Clearly there's more leverage than there ever has been or ever will be that if the banks are asking for this extraordinary help that directly benefits them and their executives, it seems unfair for them to be saying, but don't provide help like a change to the bankruptcy code for homeowners.

ARNOLD: Still, Calhoun lay odds at about 50-50 that the proposal can make it into the emerging financial markets bailout plan. Chris Arnold, NPR News.

WERTHEIMER: Lawmakers and economists have plenty of objections to the bailout plan. You can read about some of their criticisms and changes they'd like to make at npr.org.

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Why Congress Objects To The Bailout Plan

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Chris Dodd and Richard Shelby listen to Henry Paulson and Ben Bernanke i i

Senate Banking Committee Chairman Christopher Dodd (D-CT, left) and ranking Republican Sen. Richard Shelby (AL) were among the many lawmakers who raised objections to the bailout plan during testimony Tuesday from Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. Chip Somodevilla/Getty Images hide caption

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Chris Dodd and Richard Shelby listen to Henry Paulson and Ben Bernanke

Senate Banking Committee Chairman Christopher Dodd (D-CT, left) and ranking Republican Sen. Richard Shelby (AL) were among the many lawmakers who raised objections to the bailout plan during testimony Tuesday from Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

Chip Somodevilla/Getty Images

The outrage was palpable Tuesday as the Senate Banking Committee grilled Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke on the details of their $700 billion plan to bail out Wall Street with taxpayer funds. But lawmakers are hardly the only ones questioning whether the plan will work. Here's a look at some of the objections being raised on and off Capitol Hill.

It's A Huge Amount Of Power To Invest In The Treasury: The Bush administration's plan would grant the Treasury secretary nearly absolute control of the $700 billion authorized by the bailout measure. The language in the measure sent to Congress would make the Treasury secretary's decisions "non-reviewable" — including by "any court of law or any administrative agency." That would give the Treasury secretary powers that are not only extraordinary but, some would say, also unconstitutional because of the lack of accountability.

Jon Macey, a professor and deputy dean of Yale Law School, says the bill contains the largest transfer of power from Congress to the administration that he has ever seen. Macey says Congress is handing over more power than it did in granting the executive branch leeway in the Patriot Act, and more powers than when authorizing combat through the war powers clause. He says the move amounts to a sidelining of Congress.

Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, on Tuesday called the language in the plan "so troubling" and said it "cannot last" as part of the legislation.

It Represents A Fundamental Shift In The Way The U.S. Economy Works: The Bush administration's plan to bail out the nation's financial institutions represents an unprecedented intervention in free markets. If the Wall Street bailout is adopted, Republican Sen. Jim Bunning of Kentucky said last week, "the free market for all intents and purposes is dead in America."

A fundamental principle of free-market capitalism is that investors take on big risks to reap big rewards — but they also assume any losses that occur. The government's plan would radically alter that model, leaving profits private while making losses public.

It's Not The Only Viable Option For Fixing This Mess: In a nutshell, the Bush administration's plan would authorize up to $700 billion to let Treasury buy up bad mortgages from financial institutions. With these toxic assets off the books for firms, lenders would once again be willing to lend and the money would start flowing freely through the markets, the theory goes. Objections to the plan have come from both sides of the aisle — and from academics and economists who say it amounts to a huge handout to Wall Street without necessarily fixing the problem.

Many economists have proposed alternatives and alterations to the administration's proposal, some of which have been taken up by lawmakers. Details of the plan are still being negotiated, but here are some of the key points of contention:

Equity stakes: Rather than simply buying up bad loans and letting taxpayers assume all the risk, why not take shares in the financial firms in exchange, so that taxpayers could also participate in any potential profits? Banking Committee Chairman Dodd has proposed "contingency shares" that would only be issued if losses are realized on the assets bought up from a firm. In Tuesday's hearing, Paulson rejected the idea of equity shares, saying it would make the bailout program "ineffective" — though he didn't offer details on why that would be the case.

Valuing assets: There are already buyers for these toxic assets out there — they just aren't willing to buy them at prices that financial institutions find palatable. (In some cases, selling at those prices would make firms insolvent.) Many critics argue that the fundamental problem is that the financial markets lack capital, so the only way the government's plan will work is if the Treasury overpays for the assets; otherwise, why not just let investors buy them up?

So, how to price these assets? Technically, assets are only worth what a buyer is willing to pay for them. If no one wants to buy mortgage-backed securities, then right now they are worthless — but that doesn't mean they will always be worthless. Paulson has suggested that one way to set prices would be through what's known as a reverse auction, the goal of which is to drive prices down, rather than up.

But some economists note that reverse auctions work best when the assets being auctioned off are essentially identical. That's not the case with mortgage-backed securities: Some of them may have plenty of healthy, payment-producing mortgages in them, while others may be full of defaulted loans. If the government simply buys the securities with the lowest price, it may end up with $700 billion worth of the worst loans, critics say.

Executive-pay limits: Some lawmakers want any company that participates in the bailout to agree to slash the pay of its executives. After all, they say, those who created the mortgage mess shouldn't be allowed to profit from the bailout. But Paulson has resisted this idea. He argues that pay cuts would discourage firms from using the program and would force thousands of firms to review their executive compensation before participating, a time-consuming process.

Lawmakers Are Being Urged To Act While Staring At The Barrel Of A Gun: Congress is being asked to enact a fundamental restructuring of the U.S. economy — in one week. That's not a lot of time for lawmakers to weigh their options and the repercussions of their actions. In private meetings on the Hill, Paulson and Bernanke have warned lawmakers about the dire consequences of not acting — but these economic Doomsday scenarios have not been spelled out to the public.

Democratic Sen. Jon Tester of Montana told Paulson as much on Tuesday: "I fully feel the urgency ... But the truth is that we have to be given the time to do this right, or it's not going to work and we'll be back here next year or in two years asking for another $700 billion or more."

With additional reporting by Laura Conaway and Adam Davidson.