Financial Reform Watch

Shoring Up Banks and Homeowners

October 23 was a busy day for Federal Deposit Insurance Corporation Chairman Sheila Bair. In the morning, she testified before the Senate Banking Committee and made headlines about what the FDIC is doing to assist homeowners avoid foreclosures. In the afternoon, she presided over an FDIC Board of Directors meeting wherein the board adopted an interim rule for implementing the Temporary Liquidity Guarantee Program.

Under the Emergency Economic Stabilization Act of 2008 (EESA), the Treasury Secretary has authority to modify mortgage loans in order to prevent foreclosures. Senate Banking Committee Chairman Chris Dodd claims authorship of those provisions in the bill. However, in recent days, Congressional Democrats have complained the Bush Administration is putting too much emphasis on shoring up banks and not enough on helping homeowners directly. In fact, earlier in the week, House Financial Services Committee Chairman Barney Frank (D-MA) and Rep. Maxine Waters (D-CA) wrote a joint letter to President Bush urging him to appoint Bair “to head a government-wide effort to supervise and coordinate” a foreclosure reduction program.

Bair has been calling for more homeowner assistance for weeks and used yesterday's testimony to address those concerns directly. While the EESA gives the Treasury Secretary the authority “to use loan guarantees and credit enhancements to facilitate loan modifications and prevent avoidable foreclosures,” she said the FDIC is examining the use of loan guarantees “as an incentive for servicers to modify loans.” According to Bair’s outline, the government would set standards for loan modifications, guarantee those that meet the standards, and then convert unaffordable loans into ones that have long-term sustainability. She assured Senators, “The FDIC is working closely and creatively with Treasury to realize the potential benefits of this authority.” Committee Chairman Christopher Dodd (D-CT) responded favorably and said he believed Secretary Paulson was supportive of moving forward on this soon.

Later in the day, Bair was focused again on bank liquidity. The interim rule for the FDIC’s Temporary Liquidity Guarantee Program (TLGP) takes effect immediately, however the agency will still accept comments for 15 days. To avoid systemic risk, the FDIC crafted the TLGP to include two components: the debt guarantee program, which temporarily guarantees newly-issued (between October 14, 2008 and June 30, 2009) senior unsecured debt; and the transaction account guarantee program, which is a temporary guarantee program (through December 31, 2009) for funds in “certain non-interest bearing transaction accounts” at FDIC insured institutions. Enrollment in the TLGP is automatic. Institutions have until November 12, 2008 to opt-out, after which time the FDIC will charge fees for participation. A copy of the interim rule can be downloaded here.

FDIC: Temporary Liquidity Guarantee Program Interim Rule

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