Frank: Bailout bill includes foreclosure relief
NEWTON -- US Representative Barney Frank said today that homeowners facing foreclosure could renegotiate their subprime loans for 87 percent of the value of their property under the bailout bill passed on Friday.
The bailout bill authorized the US Treasury Department to purchase up to $700 billion in subprime mortgages from troubled financial firms in order to inject fresh capital into the economy and calm the US and world markets.
Frank, a Massachusetts Democrat and the chairman of the House Financial Services Committee who pushed through the bailout bill last week, said the government would direct servicing companies that handle mortgage matters on behalf of lenders to renegotiate the loans once they are bought by the government.
The subprime companies whose loans are refinanced would write down the remaining value of the loan.
He said the 87 percent provision was contained in July legislation that tried to help homeowners and the new bill instructs the Treasury to follow similar procedures in renegotiating loans held by the government.
Homeowners would be able to refinance their adjustable-rates subprime loans with fixed-rate mortgages provided by the Federal Housing Administration, said Frank, at a press conference at Newton City Hall. This would be an option only for homeowners who can afford the loans when they are renegotiated, he said. The FHA loans would be made at 90 percent of the home's current value.
Frank also said the bailout would cost the taxpayers "significantly less" than $700 billion, because the government would recoup much of that by reselling mortgages and other assets that it is acquiring in the bailout bill.
He initially said the net cost of the bailout would be around $70 billion and potentially "will cost the taxpayer nothing." But when pressed about that, he backed down and said that any estimate at this early date is a "rough estimate." Analysts said it could take years for the government to work through its portfolio of troubled loans and foreclosed homes.
Frank said the federal government has the capacity to buy up mortage-backed securities from financial companies and hold on to them and possibly sell them for a profit, it would offset the initial outlay.
"We don't have to sell it at once," he said. The cost "is clearly going to be significantly less than $700 billion," he said.
The lawmaker blamed a lack of regulation for the nation's financial crisis and said he would push for tougher regulations next year to prevent another disaster.
Frank noted that heavily regulated institutions, such as commercial banks, were not hit as hard by the subprime crisis as were independent mortgage companies that made subprime loans and Wall Street investment banks that packaged and sold the loans to investors and other lenders.
He also noted that Wall Street firms were free to borrow heavily, adding fuel to the current crisis. He said American International Group, the major insurer put into federal conservatorship, was using profits from its unregulated insurance business to invest in high risky securities, known as credit default swaps, which ultimately caused the insurer's downfall.
"The cause of this problem was a lack of financial regulation in the industry. The regulated industries have done better than the unregulated companies," he said. "If the regulated institutions had made loans, we would not be in the crisis we're in."
The government has seized some regulated institutions, including IndyMac Bank. Citigroup and Wells Fargo & Co. are in a court battle to acquire Wachovia's assets.
(By Kimberly Blanton, Globe staff)
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