Frank Vs. Paulson: Just Who Has It Right On Mortgage Defaults?

Barney Frank
Barney Frank

So here I am on Capitol Hill covering a hearing at the House Financial Services Committee (starring Chairman Barney Frank D-MA), entitled Private Sector Cooperation with Mortgage Modifications—Ensuring That Investors, Servicers, and Lenders Provide Real Help for Troubled Homeowners.

I'm thinking that it's just going to be a private-sector bashing by Barney for all that the private sector is not doing to save troubled borrowers. Instead, I hear the Chairman open his remarks with a plea to Treasury to use some of that TARP money to buy troubled loans:

"I believe that we still have a need for that funding to be used to put the federal government in the position of being the owner, so we can do the kind of sensible write-down of mortgage payments to avoid foreclosure that is in the interest of the economy as a whole."

Imagine my surprise when I learn that at the very same time the Chairman is speaking those words, the Treasury Secretary is saying just the opposite, just about a mile down Pennsylvania Avenue:

"Purchasing troubled assets—our initial focus—would take time to implement and would not be sufficient given the severity of the problem."

So no more dreams of TARP money in the mortgage investors' Christmas stockings. This as those very same private sector investors are telling the Chairman of the Financial Services Committee that while they would really like to modify as many loans as possible, they don't always have the legal authority to do that.

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Not to mention that "fiduciaries must weigh the effects of loan modification on earnings of institutional investors, such as pension funds and retail mutual funds among others," said Benjamin Allensworth of the Managed Funds Association. That means foreclosing is sometimes a better financial option for investors than drastic modification and/or write-down of loan principal.

The witnesses also told the committee that it is getting harder to modify loans because a) more and more homeowners don't want to stay in their homes because of negative equity and b) more and more homeowners can't even afford the modifications, thanks to job losses and huge consumer debt.

"Macro-economic forces bearing down on an already troubled housing market are simply too strong for private sector loan modification initiatives alone to counteract the nationwide increase in mortgage defaults and foreclosures," said Tom Deutsche of the American Securitization Forum.

Given all that these folks are saying to Barney Frank, I'm wondering how Barney Frank is going to react to his buddy Henry Paulson, who is essentially saying to private sector mortgage investors, you're on your own guys! Paulson alluded to yet another mortgage rescue plan in the works, probably not the whole loan guarantee thing he's been arguing over with FDIC Chairman Sheila Bair, but maybe something else.

"We are examining strategies to mitigate mortgage foreclosures… Now that we are not planning to purchase illiquid mortgage assets, we must find another way to meet that commitment," Paulson urged.

An editorial in the New York Times yesterday suggested some kind of plan where the government would make copayments on loans that borrowers couldn't fully afford. An insider tells me that's on the table. Alrighty then, line up kids, you're about to get your allowance, and you don't even have to do your chores!

Questions? Comments?