Bailout Likely to Give Homeowners Relief as Well

Stung by charges that the bailout of financial firms hobbled by problem mortgage assets is a rescue for Wall Street rather than Main Street, Democrats in Congress and even leaders of the Bush administration have quickly assured homeowners that they will benefit as well. And many Democrats in Congress believe that should include reducing the debt owed by homeowners with the most troubled mortgage loans.

But how much relief will trickle down to homeowners who are suffering from risky mortgage loans and falling home values remains to be seen. And what form that relief may take is up in the air as well.

At this point, it's anyone's guess what the bailout will cost. Estimates have clustered between $700 billion and $1 trillion, but until the government actually acquires distressed mortgage assets from financial institutions and eventually rehabilitates and sells those assets, the ultimate cost to the taxpayer will not be known. What is known is that along the way, plenty of people will be asking why bail out Wall Street and not Main Street? Treasury secretary Henry Paulson says the bailout will prevent the financial crisis from spreading to Main Street and damaging the economy further. But even he also acknowledges that help for struggling homeowners should be part of the equation.

In fact, Congress is already pushing for homeowner relief to be a statutory component to the relief effort. (The Treasury Department would like a "clean" bill that includes authority for loan modifications but doesn't specify the nature or extent of relief). Sen. Christopher Dodd, D-Conn., chairman of the powerful Senate Banking Committee, has proposed requiring the Treasury to "utilize a systematic approach" to loan modifications and foreclosure prevention for loans purchased by the bailout agency. Fannie Mae and Freddie Mac would be required to adopt similar modification programs under the direction of their regulator. The Dodd bill would also let bankruptcy courts modify home loans, and it would require the bailout agency to forgive a portion of the debt on bad home loans to keep borrowers in their homes in certain instances.

And, if the Treasury's "bailout" turns out to be profitable for the taxpayers, Sen. Dodd wants some of the funds devoted to an affordable housing trust fund. His counterpart in the House of Representatives, Rep. Barney Frank, D-Mass., also is pushing for the bailout agency to "leverage" the restructuring of bad loans to prevent foreclosure. "We are intent on writing a bill that gives us the power to do the adjustments," he told a conference sponsored by AARP.

Speaking on a Fox news broadcast this weekend, Mr. Paulson also said the bailout program should include relief for troubled borrowers as part of a foreclosure prevention strategy. He doused cold water on hopes that the government will actually book a profit on the bailout, however, saying it is "highly unlikely" that the government will take in as much money on asset sales as it spends on the problem assets. Ultimately, the performance of the rescue agency will be dependent upon how quickly housing markets improve, he told Fox.

In broad outlines, Treasury wants to set up a "reverse auction," in which the government would put up a pool of money and competing financial institutions would bid to see how little they would accept for their mortgage assets.

By restoring the financial system to sound footing, Mr. Paulson said the bailout will pave the way for unfreezing the credit markets and restoring growth to the economy. That probably won't be enough to sell the program to the public, however. Expect to see authorizing legislation that includes mandatory relief for homeowners, to be administered by the mortgage servicing industry.