Vital Part of Housing Bill Is Brainchild of Banks
Wednesday, June 25, 2008
A key provision of the housing bill now awaiting action in the Senate -- and widely touted as offering a lifeline to distressed homeowners -- was initially suggested to Congress by lobbyists for major banks facing their own huge losses from the subprime mortgage crisis, according to congressional staff members and bank officials.
Credit Suisse, a large investment bank heavily invested in mortgage-backed securities, proposed allowing hundreds of thousands of homeowners to refinance their mortgages with lower-cost government-insured loans, relieving financial institutions of the troubled debt.
After the bank proposed this to Congress in January, it became known as the "Credit Suisse plan" among congressional staffers and lobbyists. It later formed the basis of housing provisions in both the House and Senate.
In approaching congressional aides, the lobbyists suggested that banks take less than full payment for the distressed loans on their books. But the measures would allow financial institutions to get cash out of foreclosed properties that would otherwise sit on their books as dead weight.
Since the new loans would be guaranteed by the Federal Housing Administration (FHA), taxpayers would ultimately pay for defaults. The Congressional Budget Office projected that this could cost $1.7 billon over five years.
During the first week of January, three officials from Credit Suisse -- two from Washington and one from the mortgage-trading desk in New York -- spent a day on Capitol Hill briefing the staffs of the committees that oversee housing. They gave a brief PowerPoint presentation to the House Financial Services Committee in the morning and to the Senate Banking Committee in the afternoon.
They remained in close touch afterward, especially with House Democratic aides. They also met with officials from the FHA. The bank lobbyists provided the FHA with statistics, run through their company's computers, about the potential impact of new rules.
Bank of America executives presented a 28-page "discussion document" on March 11 to the same congressional staffs, which was marked "confidential and proprietary." It was filled with detailed explanations of how a system similar to Credit Suisse's plan might work, complete with flow charts and graphs.
Afterward, congressional aides checked with Credit Suisse officials to hear what they thought about Bank of America's suggestions. They generally agreed with Bank of America's direction but thought such elaborate legislation was not needed, people familiar with the talks said.
"The first bank that I remember recommending something like this was Credit Suisse," said House Financial Services Committee Chairman Barney Frank (D-Mass.).
But Frank said the legislation was the result of many conversations with interested parties, including fair-housing advocates. Lawmakers and bank officials defend the provision as a balanced compromise, tempered by extensive input by government regulators, that gives homeowners a chance to stay in their homes while preventing the government from having to appropriate billions of dollars to buy nonperforming mortgages.