Restoring Financial and Housing Markets

CAPAF's Michael Barr Testifies Before the House Committee on Oversight and Government Reform

SOURCE: AP/Don Ryan

Legislative measures, as well as reforms, will be needed to restore our housing and financial markets.

By Michael Barr | November 14, 2008

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Read the full testimony (CAPAF)

There is bipartisan agreement today that stemming foreclosures and restructuring troubled mortgages would slow the downward spiral harming financial institutions and the real American economy. The federal government has a range of authorities to take action. But what has been missing is a way to get servicers, who control most of these loans on behalf of mortgage-backed securities investors, to restructure the loans themselves or sell the loans to the Treasury at a discount, so the loans can be refinanced.

To date, Treasury’s efforts have largely failed. Owing a duty to countless investors with conflicting interests, servicers are paralyzed by fear of liability, restrictive tax and accounting rules, and the wrong financial incentives. What’s more, contracts typically bar servicers from selling underlying mortgage loans out of loan pools. Instead, servicers are foreclosing at alarming rates, dragging down our economy with them. Subprime loan modifications have been too small scale to date to achieve the goal of keeping large numbers of homeowners in their homes.

As explained further below, we need new legislation to unlock the securitization trusts so that servicers have the authorities they need to sell loans to Treasury at a steep discount. Treasury can then restructure them, include a shared equity feature to protect taxpayers, issue new guarantees on the restructured loans, and sell them back into the market, helping homeowners and restoring liquidity and stability to our markets.

Read the full testimony of Michael Barr before the House Committee on Oversight and Government Reform  (CAPAF)