Paulson Wants to Reserve Foreclosure Fund for Obama

At a Congressional hearing last Tuesday, Treasury Secretary Henry Paulson said that the remaining Troubled Asset Relief Program (TARP) should be saved for the Obama administration “for flexibility”. The TARP uses money from a $700 billion rescue plan for foreclosure prevention.

So far, Paulson has allocated $290 billion of the first $350 billion from TARP funds, and still has access to $60 billion. He has to give advance notice to Congress if he wants to use the remaining $350 million from the fund though.

However, Congress is not satisfied with the Treasury’s foreclosure measure which injects money into bank lenders. The Department’s program has been criticized as limited since it only helps borrowers from the government-controlled Fannie Mae and Freddie Mac. Instead, U.S. lawmakers want to look into the possibility of injecting money into automobile companies. The Federal Deposit Corporation’s (FDIC) anti-foreclosure scheme also gathered strong support.

Under FDIC Chairman Sheila Bair’s proposal, a $1000 incentive would be given to banks to help lower borrower’s loans to 31% of his monthly salary. In case the readjusted mortgages go on default, the government guarantees to share 50 percent of the losses. The FDIC estimated that only $24.4 billion from the rescue money would be used to avoid 1.5 million foreclosures.

Paulson dismissed the FDIC scheme however, saying that it was expenditure, as opposed to the current program which was an “investment”. In a similar vein, he criticized the proposal to finance automobile companies. According to Paulson, this would do little to stabilize and strengthen the financial system which the current anti-foreclosure program has the capacity to achieve.

For now, there is little that the critics could do as Paulson holds the strings to the moneybag. In addition, House Financial Services Committee Rep. Barney Fran agrees with him.

Paulson says that he is looking at alternative programs to stem the foreclosure problem. Meanwhile, Obama’s administration could look forward to inheriting a program that it does not want in the first place.