WASHINGTON, DC- Following a meeting of the Senate Banking Committee and a conference call with Chairman Ben Bernanke and Treasury Secretary Henry Paulson, U.S. Senator Bob Casey (D-PA) sent the following letter to Chairman Bernanke and Secretary Paulson on the financial crisis. The full text of the letter is attached.
“I agree that we must act quickly in some manner, but we must also include provisions to deal with the housing market turmoil that is at the root of this crisis,” wrote Senator Casey. “After more than a year of forestalled action and incomplete solutions, we have little margin for error or omission.”
Senator Casey continued: “This crisis was started and continues to be fueled by the decline in home values. While the housing bill that passed in July will help, it is not sufficient to halt the national decline in home prices or return foreclosures to pre-crisis levels. I urge you to consider measures that would expand our foreclosure efforts and help more Americans keep their homes.”
Senator Casey called for measures to help homeowners including an expansion of the HOPE for Homeowners program, encouraging modification of GSE-backed loans and facilitating early intervention with lenders to work out solutions to keep people in their homes – a program modeled after a successful effort in Philadelphia.
Earlier today, Senator Casey participated in an emergency meeting of the Senate Banking Committee to discuss next steps to respond to the financial crisis. He also discussed matters with Chairman Bernanke and Secretary Paulson today on a conference call with other Democratic senators. Chairman Bernanke and Secretary Paulson will appear before the Senate Banking Committee on Tuesday to address the economy and the government’s response; this hearing was rescheduled from this past Tuesday.
September 19, 2008
The Honorable Henry M. Paulson, Jr.
Secretary of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
The Honorable Ben S. Bernanke
Chairman, Board of Governors of the Federal Reserve System
Twentieth Street and Constitution Avenue, NW
Washington, D.C. 20551
Dear Secretary Paulson and Chairman Bernanke:
After reviewing press reports and participating in the conference call today with the two of you and other members of the Democratic caucus, I write to pose questions that I have regarding the proposal that you are currently working on to have the federal government purchase illiquid assets from US financial institutions. None of these questions or concerns should be interpreted as opposition to a coordinated intervention. I agree that we must act quickly in some manner, but we must also include provisions to deal with the housing market turmoil that is at the root of this crisis. After more than a year of forestalled action and incomplete solutions, we have little margin for error or omission.
This crisis was started and continues to be fueled by the decline in home values. While the housing bill that passed in July will help, it is not sufficient to halt the national decline in home prices or return foreclosures to pre-crisis levels. I urge you to consider measures that would expand our foreclosure efforts and help more Americans keep their homes. Aside from the direct benefits to individual families, it would help stabilize the housing market by providing greater price certainty, reduce the inventory of homes, and mitigate the costly blight that is gripping areas suffering under high foreclosures. Actions to stem foreclosures, which address the original housing market turmoil and led to the deterioration of assets and the seizing of credit markets, should also contribute substantially to stabilizing financial markets and restoring confidence in our financial institutions.
A number of proposals have been and are being made in this regard. I would like to suggest three for your strong consideration. It is my deeply held belief that they are needed now and without further delay.
I. HOPE for Homeowners
The currently enacted HOPE for Homeowners program is designed to help an estimated 400,000 homeowners. Given the delinquencies and foreclosures we have already seen and the projections that at least another 2 million homeowners will enter foreclosure in the next year, I believe that this program must be expanded.
There are a number of ways to do this and I am willing to entertain any reasonable approach. One possible method I believe is worth considering is to expand eligibility beyond homeowners whose debt to income ratio is higher than 31% now to homeowners whose debt to income ratio will in all likelihood reach that level in the next 5 years because of an interest rate adjustment.
It is abundantly clear now that the problems of subprime have spread to other mortgages. Millions of Alt-A and prime Adjustable Rate Mortgages will be adjusting in the next few years. Many of these homeowners are already underwater in their mortgages and the difficult economic conditions in the labor market further increase the likelihood that their rate adjustment and subsequent payment shock will drive many of these homeowners into foreclosure. We should act now to prevent that from happening and refinance homeowners into a loan that is affordable over the long-term.
II. GSE Moratorium/Modification
Last week, along with Senators Schumer, Menendez, and Brown, I wrote to Federal Housing Finance Agency (FHFA) Director Lockhart and the new CEOs of Fannie Mae and Freddie Mac asking them to take a proactive role in stabilizing the mortgage market by increasing loan modifications and approving modifications for loans which they securitized. The Federal Deposit Insurance Corporation (FDIC) has found that a foreclosed mortgage pays $0.30 on the dollar in the current environment, while a modified mortgage that offers the borrower an affordable monthly payment pays nearly $0.90 on the dollar. These loans are now taxpayer assets, and thus the federal government is now responsible for improving their performance.
The recently enacted Housing and Economic Recovery Act grants the Director of the FHFA the authority to develop regulations or guidance regarding capital, portfolios, and prudential management standards. I ask that you work with and urge Director Lockhart to exercise this authority to require that Fannie and Freddie declare a temporary moratorium of at least 90 days on all impending foreclosure proceedings on mortgages held in the firms’ portfolios. I think it is crucial, given that the Treasury is embarking on a bold plan to purchase large numbers of bad mortgage debt owned by countless investors and entities, that the GSEs set an example for other servicers and accelerate loan modification by waiving the requirement that only loans delinquent for 120 days may be modified.
III. Judicial Oversight of Foreclosure Proceedings
Finally, I have asked you before to look closely at a foreclosure prevention program in my home state of Pennsylvania and urge you once again to do so. Earlier this year, the City of Philadelphia and the Philadelphia Court of Common Pleas created the Residential Mortgage Foreclosure Diversion Pilot Program, designed to provide early court intervention in residential, owner occupied mortgage foreclosure cases.
By intervening early, the courts are able to facilitate loan workouts and other solutions to keep residential homeowners and their families in their homes. The court and the City, led by Mayor Michael Nutter, were able to bring together a coalition of housing advocates, volunteer attorneys, lenders, and servicers who all share the same goal of keeping as many homeowners in their homes as possible. While the interests of the groups may diverge, they have set aside those differences and realized that stemming the tide of foreclosures helps everyone.
I believe that this program can and should be replicated across the country. To facilitate that, I propose that there be a new round of counseling money conditioned on the assistance going to communities which establish similar programs. This last line of foreclosure defense can provide one more opportunity to restructure mortgages and prevent families from losing their homes.
I do not think the importance of containing the foreclosure crisis to the overall recovery of the economy can be overemphasized. As Secretary Paulson stated earlier today, illiquid mortgage assets are the underlying weakness in our financial system. Programs like Philadelphia’s encourage loan modifications and workouts that target the current financial turmoil by turning these mortgages into performing assets on a large scale.
The Broader Rescue Plan
Regarding your plan to remove distressed assets from the financial system, I have a number of questions based upon the information provided on our conference call.
Today’s financial markets and this crisis are far more complicated than previous crises, which calls into question how well we can borrow ideas from past efforts. The proposal as presented is for the government to purchase assets from financial institutions and allow those institutions to go about their business once freed of these assets. However, it is not clear what assets will be purchased, from whom, or how they will be priced.
Thus far, the assets to be acquired have been described only as “distressed.” However, financial actors have created billions of dollars of “synthetic” assets. These synthetic assets do not necessarily contain actual mortgages or slices of them, but instead reference Mortgage Backed Securities and Collateralized Debt Obligation bonds and promised to perform as well as they did. What types of assets exactly will be included? Will synthetic bonds be included? Will securitized credit card debt be included?
I would also like greater clarification of who the government will be willing to purchase assets from. These assets are owned all over the world by banks, sovereign wealth funds, pension funds, hedge funds and individual investors. Which types of financial institutions will qualify and which will not? Will insurance companies and investment banks also be included? Will we ignore pension funds that do own them and make them suffer losses?
Additionally, regardless of which assets we decide to purchase and from which source, these assets can be traded among institutions.
As you know, the price at which we purchase these assets will matter a great deal. Financial markets have seized up because these assets have been impossible to price. The best available data suggests that these have been trading at $0.20 to $0.30 on the dollar. The actual value may or may not be somewhat higher depending on the specifics of the bond, but determining that price has proved impossible for markets. This raises the question of how the government will determine prices. These prices will determine taxpayer exposure and eventual gains or losses, as well as how good a deal asset owners will get at taxpayer expense.
Finally, this situation has arisen because of the failure of regulators at every level of the financial system. I do not pretend that these problems can be addressed in the next week or even the next month, but a few problems stand out as particularly relevant to this crisis and may warrant attention now.
Mortgage origination remains woefully under-regulated. The Home Ownership Preservation and Protection Act is one piece of legislation that offers solutions to this problem. Additionally, investment banks in particular, but other institutions as well, are allowed too much discretion to use leverage at dangerous levels. Hedge funds and other institutions remain far too opaque for proper regulation. Accounting standards and off balance sheet entities prevent markets from adequately understanding the risks and obligations a company has assumed. These are a few discrete problems which have already generated some discussion and for which there are proposed solutions. Now may be the time to enact those solutions and I urge you to consider doing so.
These are extremely difficult economic times and I stand ready to do what is necessary to ensure the orderly continuation of our financial markets, protect the pension and retirement savings of hardworking Americans, and help people keep their homes. The real concern that average Americans will have is how your proposal will affect them. I share that concern and am committed to taking the actions necessary to protect them in the current environment and ensure them a prosperous and stable future.
I am pleased to see an urgency of action on your part and stand ready to discuss these issues in greater detail with you. I look forward to seeing more details on the proposal and urge you to include substantial and immediate assistance to families facing foreclosure. We will not reach a bottom to this crisis or protect taxpayers without first reaching stability in the housing market. It is imperative that any actions we take should recognize and act upon that fact.
Thank you for your service at this difficult time in our nation’s history, and I look forward to learning more about your proposal.
Robert P. Casey, Jr.
United States Senate
Cc: Majority Leader Harry Reid, United States Senate
Minority Leader Mitch McConnell, United States Senate
Chairman Christopher J. Dodd, United States Senate Committee on Banking Housing and Urban Affairs
Ranking Member Richard C. Shelby, United States Senate Committee on Banking Housing and Urban Affairs