Lawmakers, Treasury lock horns on foreclosures

By Glenn Somerville

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson and members of Congress clashed on Tuesday over the best use for the $700-billion financial bailout fund, with lawmakers demanding money to stem a national wave of mortgage foreclosures.

At a House of Representatives Financial Services Committee hearing where he was grilled over his handling of the program, Paulson said the bailout plan wasn't "a panacea for all our economic difficulties" and would be more effectively used by investing in financial companies to shore up the system.

"The rescue package was not intended to be an economic stimulus or an economic recovery package. It was intended to shore up the foundation of our economy by stabilizing the financial system," the Treasury chief insisted.

Under stiff questioning from lawmakers who charged Treasury was making up strategy as it went along, Paulson conceded he hadn't totally ruled out using bailout funds to help homeowners, but said he had "reservations" about a proposal put forward by the Federal Deposit Insurance Corp.

Rep. Barney Frank, the Massachusetts Democrat who chairs the panel, lectured Paulson, telling him mortgage relief was spelled out as an option under the bailout passed by Congress.

"The fundamental policy issue is our disappointment that funds are not being used out of the $700 billion to supplement mortgage foreclosure reduction," Frank said. "There, I believe, is an overwhelmingly ... powerful set of reasons why some of the ... money must be used for mortgage foreclosure."

FDIC Chairman Sheila Bair, at the same hearing, told lawmakers it was "essential" Treasury offer loan guarantees and credit help to slow foreclosures, and warned that 4 million to 5 million mortgages will enter foreclosure over the next two years if nothing is done.

The FDIC says its plan could avert about 1.5 million foreclosures by encouraging lenders to restructure loans by having the government share in the cost of defaults. It is estimated the plan could cost the federal government about $24 billion.

"We are clearly falling behind the curve," Bair said. "Much more aggressive intervention is needed if we are to curb the damage to our neighborhoods and broader economic health."

FED ADDS ENDORSEMENT

Rising U.S. mortgage defaults have touched off a credit crisis that is weighing on economies around the globe and threatening to push the United States into a deep and long recession.

Federal Reserve Chairman Ben Bernanke endorsed the FDIC's approach to ease foreclosures, but with some reservations, noting it could expose the government to substantial costs.

"I want to say this is a very promising approach," he said. "A very strong point of the FDIC program is it's simple and it's run by the (loan) servicers rather than the government."

The financial bailout program approved last month was originally intended to buy bad loans from banks to free them up to make fresh loans, but Treasury has scrapped that plan and has focused on using it to buy equity in financial institutions.

Some lawmakers were clearly upset at the change of course.