Capital Responsibilities: Congress Must Weigh Housing Risks

Two new regulatory moves by the Federal Reserve to help JP Morgan Chase & Co. digest Wall Street investment bank Bear Stearns Cos. should capture the attention of Congress this week as it considers sweeping legislation to help individual homeowners cope with the fallout from the housing and credit crises.

The Fed late last week decided to waive temporarily a key regulation that governs the amount of capital that JP Morgan Chase must set aside in reserves to protect against loan losses. And the U.S. central bank also allowed the big New York bank holding company to exceed temporarily the amount of money it can lend to its investment banking affiliate, which is now in the process of absorbing Bear Stearns operations and troubled mortgage-backed securities assets onto its books.

Why should this matter to Congress? Well, in both cases U.S. taxpayers are now even more on the hook for guaranteeing JP Morgan’s emergency takeover of Bear Stearns. The two decisions implicitly (though temporarily) put the FDIC-insured deposits of individual depositors at JP Morgan to work rescuing Bear Stearns as part of the emergency takeover of the Wall Street investment bank.

The regulatory details are arcane, but they follow the Fed’s decision late last month to absorb $29 billion in difficult-to-price mortgage-backed securities and other assets of Bear onto its books as part of the Fed-supported takeover of Bear by JP Morgan. The Fed’s exposure to any losses from this decision is ultimately backed by the full faith and credit of the U.S. government, which ultimately means U.S. taxpayers

All these moves, of course, were taken by the Fed to calm the exceedingly troubled global credit markets as a result of Bear’s inability to remain in business without the support of JP Morgan and the Fed. Inaction by the Fed could have had dramatic consequences, although the debate will rage for years whether other market or regulatory mechanisms could have been used to avoid as much taxpayer exposure and moral hazard.

The key point, however, is that the root cause of the still very real global credit crisis remains unaddressed—millions of responsible U.S. homeowners who face foreclosure on their homes due to circumstances beyond their control have been left out of this rescue.

Legislation is pending in Congress to address the situation, but it has been stalled by partisan bickering and demands for deals that spend precious tax dollars helping companies that were part of the problem. Congress needs to act this week, and to act as boldly to help homeowners and communities as the Fed did to help the creditors of Bear Stearns and financial market players in general..

My colleagues at The Center for American Progress have presented detailed plans for how to help responsible homeowners and the communities they live in cope with the fallout from the severe housing market downturn, which in turn will enable global credit markets to find their feet again. One of our proposals, the Great American Dream Neighborhood Stabilization, or GARDNS plan is included (though not with enough funding to make the program meaningful) in the legislation proposed by Senate Majority Leader Harry Reid (D-NV) and Senate Banking Committee Chairman Christopher Dodd (D-CT), which is now before the full Senate. The other parts of this legislation are weak and problematic.

CAP's Saving America's Family Equity, or SAFE program to is a companion to GARDNS and addresses the need to prevent existing homeowners from falling into foreclosure. Taken together, these two programs are designed to stabilize local housing markets and protect the equity that has built up in Americans' homes. SAFE and GARDNS are included in the similar companion bill proposed by House Financial Services Committee Chairman Barney Frank (D-MA), with components developed by Rep. Maxine Waters (D-CA). The hope among progressives is that these more concrete measures to help responsible homeowners and their communities will be addressed by the Senate and the House.

That’s why it’s important that as members of Congress consider this critical housing legislation this week and over the course of the rest of the month, they remember that taxpayer money is already on the line to help the Wall Street creditors of Bear Stearns cope with the fallout from the housing crisis. The judicious use of taxpayer funds to help individual responsible homeowners help themselves through these market crises is even more worthwhile.

Ed Paisley is Vice President for Editorial at the Center for American Progress.

To read more on CAP's proposals for the housing crisis, please see:

• Strengthening Our Economy: Foreclosure Prevention and Neighborhood Preservation
• Addressing Foreclosures: A Great American Dream Neighborhood Stabilization Plan

Read more from the Center for American Progress Action Fund:

• An Agenda for Federal Action on the Housing Crisis (pdf)
• Congress must act now to prompt the rapid refinancing or modification of at-risk mortgages to stabilize housing and credit markets (pdf)
• The Great American Dream Neighborhood Stabilization (GARDNS) Plan (pdf)