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Paulson bucks mortgage aid outlay; pressure grows

US Treasury Secretary Henry Paulson shot down a proposal from a top bank regulator to use the government's $700 billion financial rescue fund to rework mortgages for distressed homeowners, angering Democratic lawmakers who said more needs to be done for borrowers.

world Updated: Nov 13, 2008 11:06 IST

US Treasury Secretary Henry Paulson on Wednesday shot down a proposal from a top bank regulator to use the government's $700 billion financial rescue fund to rework mortgages for distressed homeowners, angering Democratic lawmakers who said more needs to be done for borrowers.

The proposal by Shelia Bair, the head of the Federal Deposit Insurance Corporation, would have the government underwrite failing home loans, but Paulson said that kind of aid would break from the rescue fund's aim to stabilize financial markets.

"That is a subsidy or spending program. The TARP was investment, not spending," said Paulson, who holds the purse strings to the Troubled Asset Relief Program.

Paulson's remarks came in a major speech on changes in implementing TARP, and within hours Democratic lawmakers were urging him to reconsider and dole out aid to borrowers under the plan hatched by Bair.

"It is my sincere hope that Secretary Paulson collaborates with Chairman Bair to get this program up and running as soon as possible," Senate Banking Chairman Christopher Dodd said in a statement.

While Paulson has been able to fend off Bair and her political allies for weeks now, a growing number of politicians have been howling that the rescue package has helped prop up large finance companies but not done any good for borrowers.

"Public perception is that (Paulson) gave hundreds of billions to his buddies at financial institutions while nothing to consumers," said Axel Merk, president of Merk Investments.

Following the election of Democratic Senator Barack Obama as president and the Democrats' increase of their majority in Congress, Paulson might be fighting a losing battle, said Brian Gardner, vice president at investment firm Keefe Bruyette & Woods.

"It might not happen on his watch, but I think we are going to see a broad loan modification program by the next administration," he said.

Policy Tift

Since she first floated the idea of a government guarantee for failing loans in late October, Bair has been lobbying the George W Bush administration to allocate some TARP money to bankroll such a program.

So far, Treasury has committed $250 billion to buy stakes in large banks so they can expand lending and return financial markets to good health. Paulson said he was reluctant to dole out aid to borrowers because that would make less cash available to aid finance companies.

"The top priority has to be stability, making sure we have resources in reserve to deal with any systemic events," Paulson said.

In recent weeks, companies like Citigroup Inc, Bank of America Corp, and JPMorgan Chase & Co have said they will ease some loan terms. On Monday, the federal overseer of Fannie Mae and Freddie Mac said the companies' struggling borrowers can apply to have their mortgage payments lowered to 38 per cent of their income.

Paulson credited finance companies for those efforts but critics said they are part of a piecemeal approach to the housing crisis that has so far failed to reverse the trend toward increasing delinquencies.

"What is needed is a broad-based loan modification program with resources behind it," said John Taylor of the National Community Reinvestment Coalition, an advocate for troubled borrowers.

Paulson said he is working closely with aides to President-elect Obama, whose administration will take control in January.