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More Details Emerge on Mortgage Bailout

Plan calls for U.S. purchase of up to $700 billion in mortgage assets

September 22, 2008

By MortgageDaily.com staff


More details have emerged on the Bush administration's legislative proposal to acquire mortgage assets and prevent a full-scale collapse of the U.S. financial system. The latest move is the biggest yet among a host of historical actions by the government this year.

Following the initial unveiling of the legislative plan on Friday by U.S. Treasury Secretary Henry M. Paulson Jr., stocks soared -- with the Dow Jones Industrial Average rising nearly 369 points to 11388.

The proposal follows the government's brokering of the sale of The Bear Stearns Companies LLC to JPMorgan Chase & Co. in May, the government takeover of Fannie Mae and Freddie Mac earlier this month and the government's bailout of AIG last week.

At a press conference Saturday with Colombian President Uribe, President Bush noted AIG threatened a "house of cards" to collapse.

"Tonight, the Administration put forward some constructive ideas, and I look forward to receiving more details," U.S. Sen. Christopher Dodd (D-Conn.) said in a statement Friday. "I am committed to working with the administration and my Democratic and Republican colleagues in Congress to develop robust solutions to these serious problems."

Bush explained Saturday that people were beginning to lose confidence in the system, adding that it became apparent a collapse in one part of the financial system would spread well beyond that sector and impair the ability of the average citizen and small businesses to access credit.

photo of George Bush
White House photo of President Bush
at Saturday's news conference

"The systemic risk was significant," he said. "And it required a significant response."

Under the legislative proposal, the Treasury secretary would be authorized to purchase up to $700 billion in mortgage-related assets from any U.S.-based financial institution for up to two years, according to a fact sheet released by the Treasury on Saturday. Acceptable assets include residential and commercial loans and mortgage-backed securities originated or issued on or before Sept.17, 2008.

"This is a big ticket because it's a big problem," Bush said Saturday. "The risk of doing nothing far outweighs the risk of the package."

Prices would be determined through market mechanisms such as reverse auctions, the Treasury said. The secretary could hire employees, designate financial institutions and establish vehicles to carry out provisions of the act.

The purchases would be financed by the issuance of new Treasury securities.

"As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to significantly damage our financial system and our economy, undermining job creation and income growth," the Treasury stated. "This program is intended to fundamentally and comprehensively address the root cause of our financial system's stresses by removing distressed assets from the financial system."

Within three months of the first purchases, the Treasury secretary would be required to report to Congress on actions taken under the legislation.

The administration's proposal also calls for an increase in U.S. debt to $11.3 trillion.

The Mortgage Bankers Association issued a statement Saturday supporting quick action, though it is still unaware of all the details. The trade group hopes to be involved in the process as it evolves.

Unlike the Resolution Trust Corporation, which sold off assets of failed thrifts, the latest plan is proactive in that it seeks to prevent banking failures.

And it varies from the The Home Owners' Loan Act of 1933, which through the temporary Home Owners Loan Corp. refinanced delinquent borrowers with money partly provided by the lenders that held the loans. That government entity, which acquired more than 1 million loans representing about 20 percent of all mortgages outstanding at the time, was ultimately a profitable venture.

Bush noted that under his plan, the assets would be purchased at a discount and might eventually be sold at a profit.


Related:

Paulson Announces Major Steps to Restore Mortgage Liquidity
The Bush administration announced major steps in unclogging mortgage securities in the U.S. financial system and said legislation may be passed as early as next week to relieve financial institutions of illiquid mortgage assets.


Paulson says GSEs, Treasury to step up MBS purchases

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