Reprinted here from RISMEDIA, Sept. 26, 2008-(MCT/RISMedia)
Lawmakers reached an agreement in principle Thursday on a bipartisan counterproposal to the Bush administration’s $700 billion financial bailout plan, after a two-hour negotiating session between Democrats and Republicans.
Details of the plan were not immediately released, however the announcement came just hours before Presidential hopefuls Senators Barack Obama and John McCain were to meet with President Bush and congressional leaders on the issue.
It was reported that Chris Dodd (D-Conn.), Chairman of the Senate Banking Committee said following the meeting, “We are very confident that we can act expeditiously.” A vote within days was expected.
Here’s a look at some of the critical issues on lawmakers’ minds yesterday.
The Lowdown
One key was a compromise struck early in the day in which the White House agreed to a provision that would cap executive compensation for companies that take advantage of the Treasury Department’s offer to purchase distressed mortgage-backed assets and other securities.
In his Wednesday evening primetime address, Bush tried to win over Americans infuriated at tossing a $700-billion lifeline to Wall Street megabuck moguls-saying the alternative is a Depression-style “financial panic” of lost jobs, bank failures and plunging home prices.
“Our entire economy is in danger,” Bush said in a rare prime-time address designed to whip up support for his beleaguered Wall Street bailout plan. “Ultimately our country could experience a long and painful recession.”
He spelled out “a distressing scenario” — “more banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. … More businesses would close their doors, and millions of Americans could lose their jobs,” Bush said.
Treasury Secretary Henry Paulson caved in to angry congressional demands that the pay of Wall Street bigwigs should be limited if their firms receive any bailout money from taxpayers. The latest concession by Paulson, the former Goldman Sachs chief executive who had previously resisted restrictions on CEO pay, could make it easier for lawmakers to vote for a final and historic $700 billion federal intervention to keep the nation’s financial system from collapsing.
Timing Is Everything
There were signs, too, of some movement on a Democratic proposal that would give the government an equity stake in companies that take advantage of the Treasury program.
Congressional Democrats and Republicans alike said late Wednesday that it remains possible the details of a final bill could be finished by the end of the week, although sticking points remain.
Sen. Charles Schumer (D-N.Y.) said he remained optimistic congressional negotiators could reach a compromise — but said Bush must do much more to bring in conservative Republicans who have been the plan’s harshest critics, with some comparing the bailout to “socialism.”
“What he really has to do is roll up his sleeves and get some of the Republicans to compromise on issues like helping the homeowner, helping the taxpayer and providing real oversight,” Schumer said.
“We’re not there yet, but we’re getting there, and there’s a good possibility we’ll get there in the next day or so,” Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee and a broker in negotiations with the administration, said after meeting with Paulson and Federal Reserve Chairman Ben Bernanke Wednesday night.
Paulson and Bernanke again spent much of their day attempting to firm up support for the plan amid withering criticism from members of both parties. The pair said the program was necessary to jump-start the healthy flow of credit throughout the nation’s financial system.
Testifying before a joint House-Senate committee, Bernanke used more apocalyptic language in describing the risk to the nation’s economy than he had the previous day, saying the country was facing “grave threats” to its financial stability.
He said the failure to pass a bailout bill would “affect spending and economic activity and it will cause the economy as a whole to decline and be much weaker than it otherwise would be.”
While the administration has shown some flexibility on the package, key battles remain to be fought. One involves judicial review of the Treasury Department’s actions. Another concerns giving bankruptcy judges the power to adjust mortgages to make them more affordable to stave off foreclosures for homeowners, an action known as a “cram-down.”
Sen. Jon Kyl (R-Ariz.) told CNBC Wednesday night that he considered that provision a “poison pill” for Republicans that could stall a final agreement.
What about American Homeowners?
During its board of directors meeting in San Diego, the leadership of the National Association of Home Builders (NAHB) unanimously called on Congress to act now before conditions deteriorate to a point that could trigger a global financial meltdown.
“We agree with Fed Chairman Bernanke and Treasury Secretary Paulson that immediate steps need to be taken to stem the financial crisis. The financial markets are in turmoil and the flow of credit has been severely curtailed for housing and other sectors of the economy,” said NAHB President Sandy Dunn, a home builder from Point Pleasant, W.Va. “There’s no time to waste. Congress must pass legislation as soon as possible.”
A proposal by congressional Democrats to help keep people in their homes by allowing bankruptcy court judges to rewrite troubled primary mortgage loans could overwhelm court caseloads, spark lawsuits by banks who might claim judges have too much power and further destabilize the housing market, lawyers and others involved in bankruptcy cases said Wednesday.
The legislation is being promoted by Sen. Charles Schumer (D-N.Y.) and others, who want it to become a part of Congress’ overall package to bail out the nation’s financial institutions.
The Bush administration has proposed a $700 billion bailout, but Democrats and some Republicans have said they may not go along with the proposal unless homeowners are also helped.
Under current bankruptcy laws, primary residence mortgage debt is not included in the bankruptcy process, although bankruptcy judges can restructure a debtor’s vacation home or investment property.
Changing the law could overwhelm the already crowded calendars of the bankruptcy courts, said Anthony Sabino, a bankruptcy lawyer in Mineola. “It could very well become overwhelming,” he said.
Still, he said, the measure should be tried. “Something has to get done” to help people in foreclosure.
One problem Sabino said he could foresee is that banks and other lenders may file suit against the government, saying the law gives bankruptcy judges too much power. “This could bring a flood of litigation.”
“We encourage lawmakers to immediately enact the Treasury proposal to purchase troubled assets,” said Real Estate Roundtable President and CEO Jeffrey DeBoer. “There are serious details that need to be worked out in implementing the plan and the price tag may seem high. However, negotiation over the details cannot unduly slow the process. The cost of not acting now would be far higher.”
According to the Real Estate Roundtable, real estate directly and indirectly generates economic activity equivalent to about 20 percent of GDP. It creates some 9 million jobs and generates millions of dollars in federal, regional and local tax revenue. Commercial real estate markets remains in relative equilibrium today, with industry supply and demand much stronger than in previous downturns. Yet, credit to the sector from many sources has almost completely stalled. “For owners, and for Main Street, this means property values are at risk of a freefall. For state and local governments, it means less revenue from commercial property taxes and an even tighter budget crunch. What happened to values in the residential market could very well happen on the commercial side - something which we can take steps to prevent,” said DeBoer.
Yesterday, the Mortgage Bankers Association said in a letter to Congress that it opposed any such legislation.
“Changing these rules will inevitably raise the cost of credit,” the association said. “In addition, changing the rules will further destabilize the market, as lenders will immediately have to further mark down the value of their mortgage portfolios to reflect the predictable additional new principal losses to which companies will be exposed. This will result in further instability in the market for both consumers and financial institutions.”
Gary Kusher, who heads the bankruptcy practice at Forchelli, Curto, Schwartz, Mineo, Carlino and Cohn in Mineola, questioned whether such legislation expanding the power of bankruptcy judges would be constitutional.
“It would interfere with a private contract,” Kushner said.
However, Dan Greenwood, a law professor at Hofstra University, said he doubted such legislation would create a manpower problem for the courts.
“Most of these cases will settle,” Greenwood said. “Once it’s clear the judges have the authority to renegotiate mortgage loans like everything else, people are likely to come to agreement in the shadow of the law.”
Jack Graves, a law professor at the Touro Law Center, said if something like the Democrats’ proposed legislation had been done a year ago, “we wouldn’t have had to bail out the financial institutions now.”
Democrats attempted to pass similar legislation earlier this year, but the attempt failed against Republican opposition.
Is Bailout a Housing Ills Panacea?
“There is a lot of talk about how some institutions - most recently AIG - are just too big to be allowed to fail. That may be true. But this country is made up of millions of small homeowners who can’t be allowed to fail either,” said Nancy Zirkin, executive vice president of the Leadership Conference on Civil Rights, during a press call with the Leadership Conference on Civil Rights, AARP, ACORN, and the Center for Responsible Lending.
One such homeowner, Candace Weaver of Wilmington, NC, also participated on the call. Weaver is a middle school social studies teacher and mother of two who was diagnosed with kidney cancer within a year of getting a Lehman Brothers-backed exploding ARM loan. She needed surgery to remove the cancer and contacted her mortgage servicer and asked for a one-month deferment, which they rejected. Weaver’s cancer is in remission, but her home is now in foreclosure. She is one of the more than half a million Americans who could avoid foreclosure if Congress passes the rescue bill with bankruptcy provisions intact.
“The government is bailing out the companies who did the wrong things in making these poisonous loans that were doomed to fail. I understand the bailout had to happen but unless something is done to help struggling homeowners, people like me are left out and we’re the victims. It’s not fair. The government needs to remember people like me who pay taxes and work hard every day. All we want is to get up and go to work, contribute to our communities, and keep our homes,” said Weaver.
On Wednesday, The National Association of Realtors said the median price for existing homes fell 9.5 percent in August to $203,100 — the largest price decline recorded since 1999. In the wake of these gloomy home sales statistics, builders and real estate agents have begun to debate whether the government’s $700 billion financial industry bailout will end the slide.
“Responsible government intervention will restore a functioning market benefiting homeowners, those who wish to buy a home, financial institutions, the economy and ultimately the taxpayers,” said National Association of Realtors® President Richard F. Gaylord in a statement. “We support efforts to stabilize financial markets to allow rational valuation of assets, expedite refinancing and relief efforts for homeowners, and other measures to reestablish a level of confidence in the housing credit markets. NAR will work diligently with Congress and the administration to achieve these goals as well as the broader goal of reforming the housing finance system.”
Many analysts believe the housing industry is being slowed by homeowners’ difficulties in getting mortgages. The expectation, then, is that a federal stabilization plan for banks will get money flowing again and stop the national slide in property values.
Many economists, including NAR chief economist Lawrence Yun, believe tight credit is killing potential home sales. Realtors, including Varley, say the impact of tight credit is being felt locally, too.
Robert Blackman, vice president of development for Realty USA in Clifton Park, said many prospective buyers are discouraged by the hurdles required for a mortgage. And recent Wall Street gyrations have not helped either, he said.
“They’re almost defeated before they begin,” Blackman said. “Hopefully, something will happen in Washington that will … take some of the pressure off.”
Some analysts, including Yun, predict the federal takeover this month of mortgage giants Fannie Mae and Freddie Mac could make credit more available, because the agencies tightened the money flow when their future was in doubt.
Others caution that it’s risky to pin hopes on the $700 billion bailout until final details emerge. The bill is the subject of heated debate in Congress.
Many Democrats want it to include help for homeowners facing foreclosure.
“That would attack the root of the problem,” said Marisa DiNatale, senior economist at Moody’s Economy.com, a research firm in Philadelphia. “We’re seeing record numbers of foreclosures, and it’s just adding to the supply of homes on the market.”
Still, uncertainty about the economy could hurt real estate sales, no matter what Washington does. Surveys of consumer confidence showed people were skittish about spending money even before the recent Wall Street chaos.
“People in general have been more pessimistic about the (prospects for) the economy over the next year or so,” DiNatale said. “People might not be willing to jump back into the housing market.”
Some in the housing industry had hoped the Housing and Economic Recovery Act of 2008, passed by Congress earlier this year, would kick-start home sales. The bill provides up to $7,500 in new tax credits to first-time home buyers who purchase before July 1, 2009.
But the bill hasn’t boosted sales, perhaps because it requires that buyers repay the tax savings within 15 years.
“The tax credit just wasn’t strong enough,” said Pam Krison, executive officer of the Capital Region Builders and Remodelers Association, a trade group.
The National Association of Realtors (NAR) is reporting the sales of existing homes rose to its highest level in 13 months and highest percentage increase in 5 years. What? How did this happen? Well, I'll tell you; Real estate values are lower than I've seen them in 10 years and that together with the fact that the national commitment rate for 30-year fixed rate loans fell in September to 6.04% from 6.48% in August. A year ago in September, 2007, that rate was 6.38%.
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