Paulson Pushed Toward Solution

Treasury Secretary Henry Paulson is pressured to help homeowners, then heads off in another direction, but Fed chief Ben Bernanke gets it right, says Ed Paisley.

U.S. Treasury Secretary Henry Paulson is finally beginning to see that a resolution to the global credit crisis requires an end to the U.S. housing crisis. (AP/J. Scott Applewhite)
U.S. Treasury Secretary Henry Paulson is finally beginning to see that a resolution to the global credit crisis requires an end to the U.S. housing crisis. (AP/J. Scott Applewhite)

The terms of U.S. Treasury Secretary “Hank” Paulson’s latest weekend rescue of another global financial behemoth—this time Citigroup Inc.—underscores once again that the end of the global credit crisis will first require an end to the U.S. housing crisis. The good news is that Paulson is now being forced to recognize that fact after mostly ignoring it for over a year.

Under the terms of the Treasury-led bailout of Citigroup, U.S. taxpayers will help the embattled New York-based financial institution shed $306 billion dollars of troubled assets on its books, with various caveats that importantly include “the use of mortgage modification procedures adopted by the Federal Deposit Insurance Corporation.” Apparently, this and other conditions limiting the exposure of the Federal Deposit Insurance Corporation to $10 billion were included at the insistence of FDIC Chair Sheila Bair. Bair is the leading voice in Washington today for getting to the root of the problem by modifying troubled home mortgages before they are foreclosed upon—advice that the nation’s two mortgage giants Fannie Mae and Freddie Mac are also now beginning to act upon.

Center for American Progress Action Fund Senior Fellow Michael Barr detailed how these steps were working to alleviate some of the pressure on U.S. housing markets due to the mortgage foreclosures in testimony last week before the House Committee on Oversight and Government Reform. Indeed, the FDIC’s call earlier this month for Treasury to spend $24.4 billion on credit guarantees for restructured home mortgages so that borrowers, lenders, and investors all contribute to a more stable housing market would clearly be a big step in the right direction. Paulson should embrace that plan.

CAPAF fellow Barr also detailed CAP’s proposal to help resolve the U.S. mortgage crisis by modifying the tax rules that govern the terms of mortgage-backed securities so that individual troubled mortgages could be more readily separated from perfectly sound mortgages bundled together in these securities, and then restructured so that U.S. housing prices can find a floor. This is another step that Congress should take, and one that Paulson could perhaps compel Citigroup to consider with the $306 billion in “loans and securities backed by residential real estate and commercial real estate, and their associated hedges” that Treasury just agreed to take off Citigroup’s books.

But Paulson, true to form throughout this crisis, can’t keep his focus on the housing market. Today he set off in yet another direction when Treasury and the Federal Reserve Board unveiled a new lending facility run by the Fed to support the asset-backed securities market, which the department says “declined precipitously in the third quarter of 2008 before essentially coming to a halt in October.” This new lending program may well help revive lending for new automobiles, student loans, and credit cards, but it doesn’t at all cut to the core of the housing crisis.

In contrast, Federal Reserve Bank Chairman Ben Bernanke’s new plan announced today moves in that direction. The Fed says it will spend $600 billion to revive the U.S. housing market—$100 billion to buy the debt of Fannie and Freddie and another $500 billion to buy mortgage-backed securities in the marketplace that are guaranteed by Fannie, Freddie, and Ginnie Mae. That program is supposed to be up and running by yearend, according to a Fed press release, and these assets will be purchased in a competitive process beginning by the end of the year.

These and other measures to help stabilize the housing market and then address the root cause of our economy’s present ills is what Congress envisioned when it passed its $700 billion financial rescue package earlier this fall. Paulson should get with the program in the remaining weeks of his tenure at Treasury.

Ed Paisley is Vice President for Editorial at the Center for American Progress. To read more about the center’s policy proposals for the housing and credit crises please go to the Economy page of our website.

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Ed Paisley

Senior Director, Communications and Publications