The Federal Deposit Insurance Corp. has laid out the details of its $25 billion plan to fight foreclosures. The only problem is the $25 billion part. The Treasury Department is still opposed to using the bailout money for the plan, and it is not clear that Congress is ready to force Treasury's hand.
Sheila Bair heads the FDIC, and she has been outspoken about the need to clean up the mortgage mess. That cannot be done with a toothbrush, however. You need a full-suction Hoover.
That is essentially what Bair has been saying. The Treasury Department, Fannie Mae, Freddie Mac and some banks have programs to help homeowners negotiate lower mortgage payments with their lenders. Bair, however, says those programs alone will not do the job.
"Those are not impacting, in a wide-scale way, loans that are in these private securitization trusts, and that's where many of the troubled mortgages are," she says.
Securitization trusts are a type of investment in which investors hold a complicated mix of high-risk, bad-credit home loans that are hard to untangle. To go after more of those home loans, Bair is proposing putting government funds on the line. The FDIC's proposal would set mortgage payments at a lower percentage of homeowner income. And if those home loans default a second time, the government will share the losses with the lender.
"We think we can get about 2.2 million loans modified using this protocol, and it would be at a cost of about $25 billion. And we propose the program would last through 2009," Bair says. "We think it's a reasonable amount of money, and we do think the government is getting something in return for this." Namely, she says, a more stable economy and more stability from people staying put.
There is a big problem, however. The Bush administration and the Treasury Department haven't backed Bair's plan. More important, they have suggested they won't fund it.
Bair wants to tap the government's $700 billion rescue package. The Treasury and the White House did not respond to calls requesting comment on that proposal. Earlier this week, however, Treasury Secretary Henry Paulson, who controls the purse strings, seemed to draw them shut. He said the law restricts how money from the Troubled Asset Relief Program can be used and that spending on an FDIC proposal might not be permitted.
"We must be careful to distinguish this type of assistance, which essentially involves direct spending, from the type of investments that are intended to promote financial stability, protect the taxpayer and be recovered under the TARP legislation," Paulson said.
Time Running Out For Administration
But some lawmakers dispute Paulson's assertion. Sen. Mel Martinez (R-FL) sits on the Senate Banking Committee and is a former secretary of Housing and Urban Development.
"It wouldn't take but a very small percentage of the TARP funds to fund this kind of a program, and at the end of the day, it's going to be more effective in saving banks from going into further and deeper trouble," he says.
In any event, the administration's days in office are numbered.
Ellen Seidman, a fellow at the New America Foundation, says Congress is unlikely to force Treasury to adopt the FDIC proposal before President-elect Barack Obama takes office. But that doesn't mean the FDIC proposal is dead.
"This is also out here so that in a different Congress and a different administration, there's something ready to roll," Seidman says.
There are still two months between now and then. Given how much has changed in the past two months, it seems likely any plan could change.