Financial Services Committee Chairman Barney Frank sent a letter today to Treasury Secretary Paulson, following up on issues raised at Tuesday’s House Financial Services Committee oversight hearing on the Troubled Assets Relief Program (TARP). In the letter, Chairman Frank continues his call for Secretary Paulson to immediately use funds authorized by TARP legislation to help stem foreclosures.
The full text of the letter:
The Honorable Henry M. Paulson. Jr.
Department of the Treasury
Washington, DC 20220
Dear Mr. Secretary:
I write to follow up on the November 18 House Financial Services Committee hearing on the Troubled Assets Relief Program, and to urge you in the strongest possible terms to use TARP funds immediately to support significant steps that can help stem the tidal wave of foreclosures threatening the stability of our financial system and our economy. As a first step, I applaud the regulatory changes in FHA's Hope for Homeowners program that you and the other members of the Hope for Homeowners Board approved November 19. These changes, authorized by Congress under the TARP legislation, should help expand use of the program.
As I noted in the hearing, however, the TARP statute unambiguously gives you the authority and a mandate to take much more aggressive action on foreclosures. While I support the use of TARP funds to stabilize the financial system through bank capital injections, the root causes of this crisis will remain unaddressed until TARP is deployed aggressively to mitigate the estimated 4 to 5 million foreclosures that will otherwise occur over the next two years. The Administration continues to emphasize HopeNow and other private initiatives, but they are simply not an adequate solution going forward.
At least four programs or proposals already exist that you could fund and operate through TARP to provide significant foreclosure relief:
FDIC Chairman Bair has proposed a broad program to modify and provide credit guarantees for troubled mortgages that could prevent an estimated 1.5 million foreclosures in the next year alone. Chairman Bair believes, as do I, that the authority already exists to run such a program through TARP under Section 109 of the legislation.
At the hearing economist Martin Feldstein proposed a “mortgage replacement program” allowing the government to substitute new loans for portions of existing troubled mortgages. These new government loans would replace 20% of the borrower's existing loan, with the remaining private mortgage (now for 80% of the original amount) being “full recourse,” giving the creditor access to the borrower's assets beyond the security value of the home itself. This will lower borrowers' monthly payments and provide protection against falling into negative-equity positions that encourage default and foreclosure.
The recently approved changes to the FHA Hope for Homeowners program, as noted above, will help enhance participation. However, Treasury should augment these changes by using TARP funds (under the authority in Section 109) to reduce the high level of upfront and annual fees required under Hope for Homeowners loans. These high fees are depressing program use, and using TARP funds to pay them down could significantly increase the number of foreclosures averted.
TARP also mandates that Treasury implement a plan to maximize modifications to mortgages that it acquires. Because mortgages in danger of default clearly qualify as “troubled assets,” I urge you to begin buying whole loans on a large scale for the specific purpose of modifying those loans and keeping the borrowers in their homes.
We can not afford to miss this opportunity to act. Please let me know if my staff or I can be of help in getting these initiatives up and running as quickly as possible.