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Vital Part of Housing Bill Is Brainchild of Banks
Mortgage Aid Under 'Credit Suisse Plan' Would Benefit Lenders

By Jeffrey H. Birnbaum
Washington Post Staff Writer
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.

Bank of America, which is acquiring Countrywide Financial, the country's largest mortgage lender, followed with a similar and more detailed proposal, principal negotiators on the legislation said.

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.

"The alternative to having the banks as participants was a massive federal bailout," Frank said. "They [the banks] benefit, but they benefit by losing less."

Still, critics expressed disappointment that banks were given such a large hand in writing legislation designed to ease a foreclosure problem they helped create.

"It is ironic that Congress, responding to a crisis that was created in large part by irresponsible lending, would produce a bill, the main beneficiaries of which are likely to be those lenders," said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research group. "There are aspects that work hugely to the banks' advantage."

Credit Suisse reported a $2.1 billion loss in the first quarter, one of its worst in years, because of a $5.3 billion write-down in mortgage-related assets and other loans. Bank of America reduced the value of its mortgage-related assets by $2 billion in the first quarter, on top of a $5.7 billion write-down in the last three months of 2007. Bank of America is also putting the finishing touches on its acquisition of Countrywide. Countrywide had $3 billion in losses in the first quarter alone and set aside $1.5 billion for bad loans and wrote down another $1.5 billion on souring loans.

The pursuit of legislation to help strapped homeowners began last year. Several scholars, from both the political left and right, recommended plans based on the Depression-era Home Owners' Loan Corp., which put the federal government in the business of providing mortgages. But that was eventually seen by lawmakers, including Frank and Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), as too expensive a program to win congressional approval.

Then in December, Credit Suisse officials proposed a different approach to the White House's economic advisers, according to people familiar with the plan who spoke on condition of anonymity because their employers did not allow them to speak publicly. The bank recommended to the White House -- and soon after to congressional staffers -- the broad outlines of the provision now headed for passage in Congress.

The banks would have to accept a reduction in the value of the troubled loans while qualified borrowers could then get federally insured loans to replace their private ones. The homeowners would avoid foreclosure and pay less each month. The banks would get a payment rather than a potentially nonperforming asset. Mortgage holders typically lose about 40 percent of the value of their loans on foreclosed homes.

Congressional aides said they did not simply accept the banks' proposals. Rather, they said, they worked with others, especially financial regulators, to refine the package. The Federal Deposit Insurance Corp., for instance, urged that financial institutions accept a larger cut in the borrowers' principal than first proposed, and the House measure reflects this recommendation.

Congressional staffers said they also consulted with other banks, such as Citigroup, and industry groups such as the Securities Industry and Financial Markets Association. It also hashed out concepts with La Raza, the NAACP and low-income housing groups.

But Credit Suisse and Bank of America were instrumental throughout the process. "They helped us understand the notion of how many loans were going to default based on the coming waves of foreclosure," a House aide said. "They helped us dimension up the scope of the program."

Credit Suisse said it made its suggestions to improve the mortgage market. "We've participated in a series of conversations with government entities and offered a discreet regulatory solution to improve existing affordable mortgage programs," said Duncan King, spokesman for Credit Suisse. "We hope to improve existing affordable mortgage programs."

Bank of America said its participation came at the request of congressional aides. "They were reaching out to all sorts of people who have been thoughtful about this crisis," said Peter McKillop, a spokesman for Bank of America. "They were talking to us and talking to every bank that had a sophisticated mortgage business. We wanted to come up with a bipartisan solution that stabilizes the housing market."

"The benefit to the bank," he added, "would be having a more stable housing market."

Staff writer David Cho and news researcher Madonna Lebling contributed to this report.

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