Bernanke's Mortgage Fix

by John M. Curtis
(310) 204-8700

Copyright December 4, 2008
All Rights Reserved.                    

        Finally seeing the light, Federal Reserve Board Chairman Ben S. Bernanke now believes a homeowner mortgage bailout plan is needed to save the economy.  With bank failures and unemployment spiraling, Bernanke turns his attention to distressed homeowners, whose mortgage and cash-flow problems have damaged U.S. Gross Domestic Product.  When homeowners had access to home equity lines, they contributed mightily to consumer spending, accounting for two-thirds of GDP. “This situation calls for a vigorous response,” Bernanke told a banking group in Orlando, Fl., urging a new mortgage relief component to the nation’s economic recovery program.  When Bernanke and Treasury Secretary asked Congress Sept. 23 for a $700 billion bailout, they intended to buy up “toxic debt,” known as the Toxic Asset Relief Program.  Paulson reneged Nov. 12, throwing markets for a loop.  

            House Speaker Nancy Pelosi (D-San Francisco) and Senate Majority Leader Harry Reid (D-Nev.) both urged Paulson and Bernanke to provide homeowners direct mortgage relief.  Both recognized that the nation’s soaring foreclosure rates threaten real estate values and the overall economy by crippling consumer spending.  When the $700 billion bailout was approved Oct. 2, Paulson and Bernanke believed the money was best spent on buying bad debt and injecting needed liquidity into financial institutions.  Agreeing with Pelosi and Reid, Federal Deposit Insurance Corp. Chairwoman Sheila Bair urged Paulson and Bernanke to spend a portion of the bailout directly on mortgage relief.  “Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods and the nation as a whole,” said the Fed chairman, urging loan restructuring.

            Bernanke’s plan involves lenders reducing the principle balance and corresponding interest rates to match current market conditions, making mortgage payments more affordable.  Bernanke acknowledged the reluctance of lenders to write down principle balances without federal help.  Allowing banks to reclaim lost equity from mortgages through non-repayable grants reassures financial institutions.  Paulson also wants to provide cash to Fannie Mae and Freddie Mac to buy up more mortgages, an action that could push down interest rates to around 4.5 percent.  President-elect Barack Obama has asked Paulson and Bernanke to come up with a mortgage relief plan.  He’s been working out the details with Rep. Barney Frank (D-Boston) Chairman of the House Financial Services Committee he plans to introduce the day he takes office.  Barack views mortgage relief as essential to economic recovery.

            FDIC’s Sheila Bair, a forceful advocate of urgent mortgage relief, has run afoul with New York Fed. President and newly minted Treasury Secretary Timothy Geithner, seeking to end her reign on the FDIC.  Of all government officials, Bair has bucked Paulson and Bernanke on the subject of mortgage relief.  While Bernanke has come around lately, he and Paulson opposed using taxpayer bailout money to buy up so-called “toxic assets.”  Bair’s ideas have resonated with Obama on the issue of retiring bad homeowners’ debt.  Paulson, his assistant Neel Kashkari and Beranke have been committed to bailing out banks not individuals.  Bernanke’s recent suggestion parallels Democratic proposals to help stem the foreclosure epidemic, depressing real estate values around the country.  Advocating principle reduction, Bernanke finds himself with a tough sell to commercial banks.

            Geithner’s attempt to oust Bair indicates that he seeks to protect Paulson’s uncertain gamble to place all his eggs in financial institutions.  Bair differs with Paulson on the issue of allocating $70 billion in bailout funds to directly help homeowners.  Geithner’s a bit old school that blames homeowners for biting off more than they could chew when it comes to mortgages.  Bair sees the complicity with Fannie Mae and Freddie Mac lowering borrowing standards to make homeownership available to a wide cross-section of otherwise unqualified borrowers, including many women and minorities.  Bair rejects the idea of the Fed refusing to name the banks currently receiving bailout funds.  Bair wants more transparency and accountability for financial institutions receiving federal bailout money.  If Bernanke can pour out $7.7 trillion into banks without naming names, he can give $70 billion to homeowners.

            Bernanke has started to feel the heat of Freedom of Information Act requests to find out where and how much bailout money he’s given to various banks.  His recent concessions to homeowners puts him at odds with incoming Treasury Secretary Tim Geithner whose views parallel Paulson’s, showing little interest in directly bailing out homeowners.  Geithner shouldn’t be clashing with Bair, who’s been the lone voice, apart from some Congressional Democrats, in dealing with the foreclosure crisis.  Instead of squabbling with Bair, Geithner should be trying to figure out the best way of helping struggling homeowners.  “We are looking very hard” at Bair’s proposal to use some of the bailout funds for urgent loan modifications.  Whether buying back mortgage-backed securities or restructuring loans, the Fed and Treasury must do more to help struggling homeowners get back on their feet.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet  and  Operation Charisma.

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