BACKGROUND
MEMO
TO: Editors and
Reporters
FR: Dave Rosenfeld,
OSPIRG
RE: Securing
Oregonians’ Financial Future
With the stimulus package almost a
done deal, it is time to refocus on fixing the bailout and the underlying
problems that caused the economic crisis. Yesterday, RealtyTrac announced that
Oregon had the
fifth highest foreclosure rate in the nation in January (1 foreclosure for every
357 properties). Oregon unemployment numbers continue to creep
up. Defaults on credit cards and other forms of lending are reaching crisis
proportions. Meanwhile, no one knows what became of our initial $350 billion
investment in the financial industry, except for reports of outrageous executive
compensation packages.
Lawmakers in both Salem and Washington, DC
are moving ahead with a number of proposals to fix the failed bailout and
establish a new regulatory system to protect consumers, taxpayers, and small
investors. Some of the most important components to watch are the
following:
1. Strengthening
the oversight and accountability for taxpayer funds under the Troubled Assets
Recovery Program (TARP).
The US House of Representatives
already passed the TARP Reform and Accountability Act (HR 384) and the Senate is
considering the Taxpayer Protection Act (S 195-Dorgan). When analyzing the
legislation, we recommend that reporters look for the following
elements:
- Does it provide a
detailed disclosure of how the first $350 billion was spent for all TARP fund
recipients?
- Does it outline a clear
strategy for the all TARP programs?
- Does it include
contingency or alternative plans should the program fail?
- Does it provide clear
and objective criteria for establishing eligibility for TARP assistance? As
part of that, does it include a process to ensure assets are accurately
evaluated to give a holistic picture of recipients and the taxpayer
investment?
- Does it require TARP
recipients to agree to specific terms as a condition of receiving funds? Do
those terms include metrics to make sure that the TARP recipients use the funds
to forward the objectives of the EESA, including:
-
Reporting on
lending
-
Reporting on foreclosure
assistance/loan or rate modification
-
Reporting on consumer credit
access
-
Clear consumer and taxpayer
protection provisions
-
Reporting on all activities that do
not directly support the goals
-
Terms and mechanism to repay the
taxpayer
- Does it prohibit using
funds for mergers and acquisitions?
- Does it place clear
limits and restrictions on executive pay, bonuses and payment of
dividends?
For more
background:
·
OSPIRG, Failing the Bailout: Lessons for Obama From Bush’s
Failures on TARP: www.ospirg.org/reports/, Jan.
2009
·
Government Accountability Office
(GAO), Internal Report to the United States
Congress, Special Inspector General – Troubled Asset Relief Program,
http://www.gao.gov/new.items/d09296.pdf,
Jan 2009.
·
Congressional Oversight Panel,
Accountability for the Troubled Asset Relief
Program, Second Report, Jan. 2009, http://cop.senate.gov/
2. Stabilizing
the housing market
Oregon is already
experiencing record foreclosures as a result of lax lending standards. As
unemployment nears double digits, we could see another wave of foreclosures on
homeowners who can no longer afford their loans due to job loss. This will
further destabilize the housing market and weaken the economy. Fortunately,
lawmakers have several policy instruments to help stop the
bleeding:
- Require TARP recipients
to set benchmarks for foreclosure assistance and rate modification. This
proposal could be included in the final TARP reform package outlined
above.
- Allow bankruptcy judges
to modify homeowners’ loans when appropriate. This might become a part of the
TARP reform, be a separate piece of legislation, or included in a larger plan by
the Obama Administration next week to spend $50 billion on loan
modifications.
- Put further incentives
in place for servicers to implement sustainable loan modifications. This could
take several forms. One way might be to implement a fixed-date moratorium on
foreclosure proceedings that gets lifted if the lender attempts a loan
modification (with some criteria for acceptable modification attempts, such as
shooting for a sustainable debt-to-income ratio for the borrower, net benefit
for the investor, etc). This kind of policy could be enacted at the state
level, and complement the above measures well.
For more
background:
·
Fitch Ratings reports:
U.S. RMBS Servicers Must Focus on Sustainability of
Borrower Plan
·
http://www.marketwatch.com/news/story/fitch-us-rmbs-servicers-must/story.aspx?guid={85821AE8-7151-4D98-9520-B794A3370155}&dist=msr_2
·
Social Science Research Network,
Deleveraging the American Homeowner: The
Failure of 2008 Voluntary Mortgage Contract Modifications, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1325534
·
FDIC Loss Sharing Proposal to
Promote Affordable Loan Modifications http://www.fdic.gov/consumers/loans/loanmod/
3. Restructuring
oversight of the financial marketplace
The Congressional Oversight Panel,
chaired by Harvard Professor Elizabeth Warren, made a set of long term
recommendations in its most recent report to ensure this financial crisis does
not happen again.
Professor Warren has recommended
that above all, it is critical to establish a Consumer Credit Safety Commission
to watchdog financial markets on behalf of consumers. Had such an agency been
in effect five years ago, it could have flagged and stopped sketchy products
such as subprime and exploding interest only loans from being issued to
residential buyers. US Senator Dick Durbin and Representatives Delahunt and
Brad Miller are expected to re-introduce this legislation (S 3629 and HR 7258)
in the coming weeks.
There are several reasons why this
is the most important structural fix:
- The current regulatory
system cannot watchdog financial institutions and consumers at the same time.
Even if it had a more consumer-friendly orientation, institutions like the
Federal Reserve are simply not set up to watchdog the interests of consumers
well. Having a separate agency, with full jurisdictional powers, can ensure
that consumers have a full-time watchdog on the beat to ensure the marketplace
is playing smart and fair.
- It can more nimbly
respond to emerging financial products that might be harmful for consumers. In
the absence of a full-time consumer watchdog, lawmakers are forced to play
“whack-a-mole” with the ever-changing industry – hardly an efficient way to
guarantee a responsive marketplace.
OSPIRG will release a more thorough
analysis of this and other COP proposals in the coming
weeks.
For more
background:
·
Congressional Oversight Panel,
Accountability for the Troubled Asset Relief
Program, Second Report, Jan. 2009, http://cop.senate.gov/
