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Paulson’s Regulatory Reform Plan
Distracts – but only Briefly from Continuing Subprime Mortgage
Travails
Treasury
Secretary Henry Paulson hasn’t managed to end the subprime
lending crisis, but he did succeed in driving it briefly from
the front pages last week, by unveiling a sweeping plan for
reconfiguring the regulatory framework for the nation’s
financial system. Paulson’s proposal certainly attracted the
attention of credit union executives, who were stunned – and
not in a good way – by the plan to consolidate regulatory
oversight and establish a single federal bank charter,
effectively eliminating separate charters for savings and loan
institutions and credit unions.
Credit union trade groups responded immediately. “[The
proposal] fails to acknowledge the distinct and unique role”
credit unions play in the economic marketplace,” Fred Becker,
president of the National Association of Federal Credit Unions (NAFCU),
complained. Dan Mica, president and CEO of the Credit Union
National Association (CUNA) was even more caustic, saying the
association was “astonished and angered” by what he termed a
“flawed” plan that “makes no sense” for consumers. “The
consolidation plan will only result in increased loan rates,
decreased savings rates, higher fees, and the loss of a
not-for-profit alternative” for credit union members. The
bottom line will be “more choices for Wall Street and less for
consumers,” Mica asserted, adding that CUNA will “immediately
move to energize our grassroots and political activists” to
oppose the plan.
Initial reaction suggests that when the battle over Paulson’s
plan begins in earnest, credit unions will have a lot of company
on the front lines. Wall Street investment banks, commercial
banks, thrift institutions, legislators and regulators
(especially those that would be eliminated in the proposed
restructuring) have already expressed varying degrees of
“concern” about the blueprint for regulatory change – Washington
code for, “we’ll do everything we can to defeat it when the time
comes.”
Even
if some components of the plan are eventually approved,
implementing the changes will be another matter entirely. “It’s
easy enough to say that the current system doesn’t make any
sense, that it’s a crazy quilt of regulations,” David Beim, a
finance professor at Columbia business School, told the
Washington Post. “But it’s very difficult to put
institutions together. People howl and protest; there is turf
to be protected. It’s painfully difficult to merge institutions
that don’t want to merge.”
Focus on Housing
For the near term, at least, the howling that is
grabbing the ear of Congress is coming from the housing market,
which continues to generate increasingly distressing reports,
among them: Defaults on privately insured mortgages increased
more than 38 percent in February, remaining above the
60,000-mark for the fourth consecutive month and adding to the
already bulging supply of unsold homes. While the number of
foreclosed homes more than doubled last year, sales of those
properties increased by only 4.4 percent, according to data
compiled by First American Core Logic.
New
and existing home sales both continued their downward year-over
year spiral in February and home prices also continued to sage.
The widely-monitored Standard&Poor’s/Case-Schiller price index
recorded a 10.7 percent decline in its composite index of 20
metropolitan areas, with hard-hit markets, such as Phoenix and
Las Vegas posting drops of nearly 20 percent. Boston looked
almost healthy by contrast, with a 3.4 percent year-over-year
price decline.
The
National Association of Realtors hailed February’s slight (2.9
percent) increase in existing home sales compared with January –
the first month-over-month increase recorded since last July –
and a sign, NAR analysts suggested that the market was finally
nearing the bottom of this cycle. But the consensus is that
judgment is premature.
“There are signs that housing’s problems are being addressed,
but I wouldn’t break out the champagne yet,” Paul Kasril, chief
economist for Northern Trust, told CNNMoney. “We still
have a long way to go,” Kasril added.
It
was this continuing drumbeat of negative reports – declining
home sales, rising foreclosures, and mounting evidence that the
economy has fallen into a recession or is teetering on the edge
of one – that greeted legislators returning to Washing after a
two-week recess. Not surprisingly, they found the housing
assistance measures pending when they left still topped the
agendas of both the House and the Senate.
Mood for Compromise
Reflecting growing pressure on Congress to “do
something” about the problems, Republicans and Democrats quickly
agreed on a bipartisan housing stimulus bill, replacing the
Democrat-backed measure Republicans had successfully blocked
before the recess. It’s not hard to understand why Republicans,
who had flatly opposed a government-funded “bailout” of
struggling home owners, are more amendable to compromise now.
Two words explain the shift: “Bear Stearns.”
The
Federal Reserve’s decision to extend a $30 billion line of
credit to facilitate the purchase of the investment bank and
avert its failure, led to the obvious question: If the
government will bail out an investment bank, why can’t it help
homeowners in danger of losing their homes? The bipartisan
measure, co-sponsored by Sen. Christopher Dodd (D-CT), chairman
of the Senate Banking Committee, and Sen. Richard Shelby (R-AL),
the committee’s ranking Republican, eliminated what had been a
particularly contentious provision – allowing bankruptcy judges
to restructure the terms of residential mortgages. But it
provided varying forms of assistance for borrowers, builders,
and local and state governments hit hard by mounting
foreclosures. Key provisions include:
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$10 billion in tax-free municipal bonds,
which states can use to refinance underwater subprime
mortgages.
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A tax credit of $7,000 for buyers who
purchase foreclosed homes.
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A standard property tax deduction for
homeowners who do not itemize their deductions.
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$4 billion in grants to state and local
governments for the purchase and renovation of foreclosed
homes and $100 million in funding for housing counselors
working with owners at risk of foreclosure.
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A tax break for builders, extending the time
within which they can claim an operating loss.
“It’s not a complete product,” Dodd said, “but it
is a major step in the right direction to begin to offer that
level of confidence that people look to.”
Debate on the bill was expected to begin late
last week, with several amendments – (including the addition of
the controversial bankruptcy provision that was stripped from
the measure) -- anticipated.
More to Come
The Senate bill is one of several housing
assistance measures on the Congressional docket. Also pending
are similar although not identical Senate and House measures
sponsored respectively by Dodd and Rep. Barney Frank (D-MA),
chairman of the House Financial Services Committee that would
allow the Federal Housing Administration (FHA) to insure the
refinancing of between $300 million and $400 million of
underwater subprime loans, contingent on the willingness of
mortgage holders or servicers to “write down” a portion of the
outstanding loan balance. While acknowledging that the plan may
benefit some borrowers who made poor decisions, Frank and Dodd
have argued that the alternative – long-term damage to the
housing market, affecting all homeowners and the economy – is
much worse and far more costly.
Industry executives have expressed cautious support for the
Dodd-Frank proposals, with lobbyists for some trade groups
reporting that at least some of their members think they could
work with the structures the legislators have outlined. How the
Bush Administration will respond is unclear. The measures are
clearly at odds with the Administration’s adamant and
oft-repeated
opposition to a taxpayer “bailout” in any form.
However, the Bear-Stearns bail-out has altered the political
equation for the Administration as it has for Republican
legislators, leading Treasury Secretary Paulson to tell
reporters recently that the Administration would be “flexible”
on the terms of housing assistance legislation enacted by
Congress.
Even
before that statement, press reports had suggested that Treasury
Department staff members were engaged actively in negotiations
with Frank on the details of his housing assistance
legislation.
Asked
about the prospects for that measure, Frank rated its odds of
passage as “very high ---75 to 80 percent,” telling a National
Public Radio reporter, “I think there are strong forces that
will say, either pass this [bill] or a modification of it,
because we can’t simply allow the economy to continue to
deteriorate – not just in the United States, but worldwide.”
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