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Treasury Scraps Plan to Purchase Troubled Mortgages

U.S. Treasury Secretary Henry Paulson announced this afternoon that the government's plan to purchase financial institutions' under-performing mortgages has been put on hold. In fact, based on Paulson's remarks, it is unlikely that the Treasury will conduct any auctions to purchase bad loans and other troubled assets - the original intention of the $700 billion bailout package. Instead, the Department is expected to continue its efforts of injecting capital directly into the financial sector.
In discussing the best application of the now mis-named Troubled Asset Relief Program (TARP), Paulson said, ""Our assessment at this time is that this [individual asset purchases] is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.""
He remarked that the government has already taken the necessary steps to prevent a broad systemic economic failure. These steps include the initial $250 billion equity purchase program - a move that Paulson called the fastest and most productive means of using our new authorities to stabilize our financial system"" - and changes to the ""Federal Deposit Insurance Corporation's (FDIC's) agenda, such as a temporary guarantee on banks' unsecured debt and non-interest bearing transaction accounts.
""Both at home and around the world we have already seen signs of improvement,"" Paulson told reporters. ""Our system is stronger and more stable than just a few weeks ago.""
Paulson acknowledged that although we may be in a better economic position overall, one of the biggest challenges of a weak economy that must be addressed is the housing correction, and he stated that ""both banks and non-banks may well need more capital given their troubled asset holdings.""
To that end, Paulson outlined three priorities for the remaining TARP funds. ""First, we must continue to reinforce the stability of the financial system, so that banks and other institutions critical to the provision of credit are able to support economic recovery and growth,"" he said. Second, the markets for securitizing credit outside of the banking system also need support, including credit card receivables, auto loans, and student loans. ""This market, which is vital for lending and growth, has for all practical purposes ground to a halt,"" Paulson said. And third, we must continue to explore ways to reduce the risk of foreclosure, he added.
""In crafting the financial rescue package, we and the Congress agreed that Treasury would use its leverage as a major purchaser of troubled mortgages to work with servicers and achieve more aggressive mortgage modification standards,"" Paulson said. ""Now that we are not planning to purchase illiquid mortgage assets, we must find another way to meet that commitment.""
The Treasury has already expressed a desire to extend rescue funding to businesses other than banks, such as insurers and other finance companies, and it has been under increasing pressure to provide assistance to the ailing auto sector. In addition, Paulson told reporters today that the Department might require recipients of future pay-outs to raise private capital to match the government's injection. ""Stronger capital positions will enable financial institutions to better manage the illiquid assets on their books and better ensure that they remain healthy,"" Paulson said.
Currently, the Treasury has just $60 billion left of the first rescue fund installment, after committing $250 billion to banks and buying an additional $40 billion preferred shares in American International Group (AIG). Either the current or next administration will have to put in a direct request to Congress for the second half of the $700 billion bailout money.
House Financial Services Chairman Barney Frank (D-Massachusetts) said that he strongly disagreed with the Treasury's plan to put asset purchases on hold. The rescue funding should be used for exactly that purpose, Frank said at a hearing on Capitol Hill, noting that Congress gave the Treasury explicit authority to buy up mortgage-backed securities and whole mortgage loans when it passed the Emergency Economic Stabilization Act (EESA).
You may recall that DSNews.com
warned readers about the possibility of the asset purchase part of TARP falling by the wayside in an October article entitled ""UPDATE: What About the Bad Mortgagesx""

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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