Treasury Secretary Henry Paulson hasn’t managed to end the subprime lending crisis, but he did succeed in driving it briefly from the front pages last week, by unveiling a sweeping plan for reconfiguring the regulatory framework for the nation’s financial system. Paulson’s proposal certainly attracted the attention of credit union executives, who were stunned – and not in a good way – by the plan to consolidate regulatory oversight and establish a single federal bank charter, effectively eliminating separate charters for savings and loan institutions and credit unions.
Credit union trade groups responded immediately. “[The proposal] fails to acknowledge the distinct and unique role” credit unions play in the economic marketplace,” Fred Becker, president of the National Association of Federal Credit Unions (NAFCU), complained. Dan Mica, president and CEO of the Credit Union National Association (CUNA) was even more caustic, saying the association was “astonished and angered” by what he termed a “flawed” plan that “makes no sense” for consumers. “The consolidation plan will only result in increased loan rates, decreased savings rates, higher fees, and the loss of a not-for-profit alternative” for credit union members. The bottom line will be “more choices for Wall Street and less for consumers,” Mica asserted, adding that CUNA will “immediately move to energize our grassroots and political activists” to oppose the plan.
Initial reaction suggests that when the battle over Paulson’s plan begins in earnest, credit unions will have a lot of company on the front lines. Wall Street investment banks, commercial banks, thrift institutions, legislators and regulators (especially those that would be eliminated in the proposed restructuring) have already expressed varying degrees of “concern” about the blueprint for regulatory change – Washington code for, “we’ll do everything we can to defeat it when the time comes.”
Even if some components of the plan are eventually approved, implementing the changes will be another matter entirely. “It’s easy enough to say that the current system doesn’t make any sense, that it’s a crazy quilt of regulations,” David Beim, a finance professor at Columbia business School, told the Washington Post. “But it’s very difficult to put institutions together. People howl and protest; there is turf to be protected. It’s painfully difficult to merge institutions that don’t want to merge.”
Focus on Housing
For the near term, at least, the howling that is grabbing the ear of Congress is coming from the housing market, which continues to generate increasingly distressing reports, among them: Defaults on privately insured mortgages increased more than 38 percent in February, remaining above the 60,000-mark for the fourth consecutive month and adding to the already bulging supply of unsold homes. While the number of foreclosed homes more than doubled last year, sales of those properties increased by only 4.4 percent, according to data compiled by First American Core Logic.
New and existing home sales both continued their downward year-over year spiral in February and home prices also continued to sage. The widely-monitored Standard&Poor’s/Case-Schiller price index recorded a 10.7 percent decline in its composite index of 20 metropolitan areas, with hard-hit markets, such as Phoenix and Las Vegas posting drops of nearly 20 percent. Boston looked almost healthy by contrast, with a 3.4 percent year-over-year price decline.
The National Association of Realtors hailed February’s slight (2.9 percent) increase in existing home sales compared with January – the first month-over-month increase recorded since last July – and a sign, NAR analysts suggested that the market was finally nearing the bottom of this cycle. But the consensus is that judgment is premature.
“There are signs that housing’s problems are being addressed, but I wouldn’t break out the champagne yet,” Paul Kasril, chief economist for Northern Trust, told CNNMoney. “We still have a long way to go,” Kasril added.
It was this continuing drumbeat of negative reports – declining home sales, rising foreclosures, and mounting evidence that the economy has fallen into a recession or is teetering on the edge of one – that greeted legislators returning to Washing after a two-week recess. Not surprisingly, they found the housing assistance measures pending when they left still topped the agendas of both the House and the Senate.
Mood for Compromise
Reflecting growing pressure on Congress to “do something” about the problems, Republicans and Democrats quickly agreed on a bipartisan housing stimulus bill, replacing the Democrat-backed measure Republicans had successfully blocked before the recess. It’s not hard to understand why Republicans, who had flatly opposed a government-funded “bailout” of struggling home owners, are more amendable to compromise now. Two words explain the shift: “Bear Stearns.”
The Federal Reserve’s decision to extend a $30 billion line of credit to facilitate the purchase of the investment bank and avert its failure, led to the obvious question: If the government will bail out an investment bank, why can’t it help homeowners in danger of losing their homes? The bipartisan measure, co-sponsored by Sen. Christopher Dodd (D-CT), chairman of the Senate Banking Committee, and Sen. Richard Shelby (R-AL), the committee’s ranking Republican, eliminated what had been a particularly contentious provision – allowing bankruptcy judges to restructure the terms of residential mortgages. But it provided varying forms of assistance for borrowers, builders, and local and state governments hit hard by mounting foreclosures. Key provisions include:
$10 billion in tax-free municipal bonds, which states can use to refinance underwater subprime mortgages.
- A tax credit of $7,000 for buyers who purchase foreclosed homes.
- A standard property tax deduction for homeowners who do not itemize their deductions.
- $4 billion in grants to state and local governments for the purchase and renovation of foreclosed homes and $100 million in funding for housing counselors working with owners at risk of foreclosure.
- A tax break for builders, extending the time within which they can claim an operating loss.
- “It’s not a complete product,” Dodd said, “but it is a major step in the right direction to begin to offer that level of confidence that people look to.”
- Debate on the bill was expected to begin late last week, with several amendments – (including the addition of the controversial bankruptcy provision that was stripped from the measure) -- anticipated.
More to Come
The Senate bill is one of several housing assistance measures on the Congressional docket. Also pending are similar although not identical Senate and House measures sponsored respectively by Dodd and Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee that would allow the Federal Housing Administration (FHA) to insure the refinancing of between $300 million and $400 million of underwater subprime loans, contingent on the willingness of mortgage holders or servicers to “write down” a portion of the outstanding loan balance. While acknowledging that the plan may benefit some borrowers who made poor decisions, Frank and Dodd have argued that the alternative – long-term damage to the housing market, affecting all homeowners and the economy – is much worse and far more costly.
Industry executives have expressed cautious support for the Dodd-Frank proposals, with lobbyists for some trade groups reporting that at least some of their members think they could work with the structures the legislators have outlined. How the Bush Administration will respond is unclear. The measures are clearly at odds with the Administration’s adamant and oft-repeated opposition to a taxpayer “bailout” in any form. However, the Bear-Stearns bail-out has altered the political equation for the Administration as it has for Republican legislators, leading Treasury Secretary Paulson to tell reporters recently that the Administration would be “flexible” on the terms of housing assistance legislation enacted by Congress.
Even before that statement, press reports had suggested that Treasury Department staff members were engaged actively in negotiations with Frank on the details of his housing assistance legislation.
Asked about the prospects for that measure, Frank rated its odds of passage as “very high ---75 to 80 percent,” telling a National Public Radio reporter, “I think there are strong forces that will say, either pass this [bill] or a modification of it, because we can’t simply allow the economy to continue to deteriorate – not just in the United States, but worldwide.”
