WASHINGTON The Treasury is being urged to soak up billions of dollars of soured mortgage investments in a move that would return the $700 billion financial rescue fund to its original purpose.
Backers of the plan, including banking regulators, housing industry officials and bankers, say the about-face for the Troubled Asset Relief Program (TARP) would help both banks and homeowners.
Since it was conceived in September, TARP has been retooled as a capital-injection program and Treasury has almost fulfilled its promise to buy $250 billion worth of stakes in banks. Another $100 billion has been doled out in other emergency measures.
President-elect Barack Obama has asked Congress to unlock the remaining $350 billion of the rescue money which lawmakers hope to divvy up among several initiatives meant to prevent foreclosures and restore credit availability.
"TARP needs to be used to buy illiquid mortgages and for the government to modify those loans," Lawrence Yun, the chief economist for the National Association of Realtors, said in a statement.
Treasury would need a big chunk of money to fund an asset-purchase program and the initiative would be cumbersome to manage but backers say the effort would almost uniquely achieve the dual goals of helping homeowners and the financial system at large.
"If the government becomes the sole owner of these mortgage assets, it's easier for them to rewrite the terms," said Lawrence White, a finance professor at New York University. "There are virtues to the original plan that seem to have been forgotten."
Federal Reserve Vice Chairman Donald Kohn expressed support for the idea at a Congressional hearing on Tuesday as did the Federal Deposit Insurance Corp which maintains a fund to protect depositors.
"Preventable foreclosures harm not only the affected borrowers and their communities but also, through their effects on the housing market, the broader economy and the financial system as well," said Kohn.
John Bovenzi, chief operating officer for the FDIC, said that removing problem assets from banks' balance sheets should be "a key component" of the second half of the TARP funds.
"Such a program is necessary to expand banks' balance sheet capacity to undertake new lending as well as to attract private equity investment," he told the U.S. House of Representatives Financial Services Committee.
Andrew Jakabovics of the Center for American Progress sees value in collecting troubled loans from the disparate investors who now hold them.
"The government could really triage these loans in a unique way once they own them," said the researcher with the liberal think tank that is acts as an incubator for Democratic Party policy.
"Also, the government could buy these housing assets at such a discount that taxpayers could see an upside to this."
Banks have been weighed down by their bad housing bets that are selling at deep discounts when anyone is even buying. Meanwhile, millions of homeowners have been locked in unaffordable loans heading for default.
The TARP program was originally pitched as a rescue two-step where the government would buy Wall Street's failing mortgage investments and then rewrite those loans to help homeowners.
The Treasury Department got a blessing from Congress but policymakers changed the plan as investor panic spread.
Making direct investments in banks would restore credit markets faster than buying bad assets, Treasury decided, and there was not enough money to both buy capital and bad loans.
GUARANTEES VERSUS PURCHASES
"For the asset purchase program to be effective, it must be done on a very large scale," Neel Kashkari, the Treasury's top TARP official, said in a speech last week.
Democratic leaders in Congress and the President-elect Obama's transition team have already begun to carve up the remaining $350 billion in rescue funds leaving little for asset purchases.
Banking lobbyists say such a program could still work if the government were to guarantee bad loans rather than purchase them outright. The Federal Reserve has pioneered several such blended approaches to aid during the ongoing crisis.
Federal Reserve Chairman Ben Bernanke said on Tuesday that the government could consider public purchases of these problem assets, asset guarantees, or setting up a so-called bad bank to take over assets in exchange for cash and equity.
"Should the Treasury decide to supplement injections of capital by removing troubled assets from institutions' balance sheets, as was initially proposed for the U.S. financial rescue plan, several approaches might be considered," Bernanke said.
A toxic assets purchase program could also ease the public perception that the financial bailout plan has been targeted at Wall Street instead of consumers.
"This is the bridge between helping banks and helping homeowners," said Jakabovics, who has brought the idea to Capitol Hill and to members of the Obama transition team.
(Editing by Tim Dobbyn)