Congress Will Set Conditions for $350 Billion in Rescue Funds

By Alison Vekshin

Dec. 20 (Bloomberg) -- Congress will use the remaining $350 billion in a U.S. bank-rescue package to force the Bush administration and President-elect Barack Obama into providing foreclosure aid as the pace of people losing their homes soars.

Lawmakers will agree to release the funds in exchange for Treasury Secretary Henry Paulson and Obama agreeing to programs that cut interest rates and forgive a portion of a mortgage’s principal, House Financial Services Committee Chairman Barney Frank said in a telephone interview yesterday.

Frank said legislation is being drafted that will set the conditions on spending the cash after Paulson used almost half the $700 billion Troubled Asset Relief Program to boost bank capital. Paulson resisted calls to support foreclosure relief.

“The Democrats are finally getting it, that this administration is not going to do anything to help homeowners, and they are getting more proactive,” John Taylor, president of the National Community Reinvestment Coalition, said in a telephone interview. “Paulson has had the chance to do something like this all along, but has chosen not to. I think he’ll do it if a quid pro quo is held over him.”

Frank, a Massachusetts Democrat, said in the interview he’s drafting legislation with Senate Banking Committee Chairman Christopher Dodd that would release the remaining $350 billion in exchange for foreclosure help, aid for General Motors Corp. and Chrysler LLC and provisions to hold banks accountable for stepped up lending to consumers.

The measure would adopt a Federal Deposit Insurance Corp. foreclosure plan, revamp the Hope for Homeowners loan-relief program that has attracted few lenders and support a Treasury program to cut rates on some fixed-rate home-loans.

Agreement Sought

“We should have an agreement among Obama, Paulson and the congressional leadership to release the $350 billion with conditions on how it’s spent,” Frank said. “We need the second $350 billion, but it can only be done if there’s an agreement as to how to do it.”

Paulson urged Congress yesterday to release the second half of the rescue funds after the government exhausted $350 billion in less than three months.

“Congress will need to release the remainder of the TARP to support financial market stability,” Paulson said in a statement released in Washington. “I will discuss that process with the congressional leadership and the president-elect’s transition team in the near future.”

Frank said the legislation will include FDIC Chairman Sheila Bair’s foreclosure-prevention plan, which provides a U.S. guarantee for troubled mortgages to spur loan modifications.

FDIC Program

Paulson has declined to adopt the proposal, while Bair has said the law enacted in October gives the Treasury authority to fund a plan she said might prevent 1.5 million foreclosures through next year at a cost of $24 billion. U.S. foreclosure filings climbed 28 percent in November from a year earlier, data provider RealtyTrac Inc. said Dec. 11.

Frank also plans to revise Hope for Homeowners passed by Congress in July. The program, run by the Federal Housing Administration, is aimed at helping about 400,000 homeowners by insuring as much as $300 billion in refinanced loans after servicers forgive part of the loan balance. Few lenders have signed up because banks must cut a large portion of the loan and pay high fees.

Frank said he wants to include a proposal Paulson is considering that would use Fannie Mae and Freddie Mac, the federally chartered mortgage financers the U.S. seized in September, to reduce 30-year, fixed home-loan rates to about 4.5 percent from an average of about 5.54 percent.

Feldstein’s Proposal

He also plans to adapt a plan from Harvard University economist Martin Feldstein to let the government substitute a new loan with a lower interest rate for a portion of an existing troubled mortgage.

“I just view this as Barney with a cattle prod, saying ‘put more emphasis on foreclosure relief,’” Gilbert Schwartz, a former Federal Reserve counsel and now a partner at law firm Schwartz & Ballen in Washington, said in an interview.

Frank said he’s ready to act on the legislation during the final month of the Bush administration, without waiting until Obama’s Jan. 20 inauguration.

“Why wait three weeks? Let’s do it,” Frank said. “We’re in a crisis now. How many people’s homes will be foreclosed?”

Lawmakers will have a chance to vote for a bill to reject Paulson’s request for the funds, “but I think they should also have a chance to vote for a bill that allows it to go forward with these conditions,” Frank said.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.