Correction to This Article
This article incorrectly attributed to James B. Lockhart III, director of the Federal Housing Finance Agency, two details about a mortgage modification program being developed by the federal government. The information came from other experts. The details included the possibility that loans could be modified for borrowers who have fallen behind in their payments by as little as a single month and that lenders may be able to reduce payments to a lower percentage of a homeowner's income.
New Bailout May Top $1.5 Trillion
Plan Aims to Aid Banks, Spur Lending, Push Private Investors to Buy Toxic Assets

By David Cho and Lori Montgomery
Washington Post Staff Writers
Tuesday, February 10, 2009

The gravity of the financial crisis confronting the Obama administration will come into stark focus today when officials unveil a three-pronged rescue program that may commit up to $1.5 trillion in public and private funds, and possibly more, lawmakers and other officials said.

In announcing the plan, Treasury Secretary Timothy F. Geithner will not ask Congress for more funds than the roughly $350 billion that remain in the Treasury Department's original rescue package for the financial system, though congressional sources said such a request could come later if the new programs are unsuccessful. The rest of the money would come from other government agencies, such as the Federal Reserve, as well as private-sector contributions.

A senior administration official warned last night that the ultimate cost to taxpayers has not been determined. Several of the programs have not been finalized, and most are designed to ultimately return money to taxpayers.

Geithner plans to announce a public-private partnership that would seek to finance the purchasing of toxic bank assets that are at the heart of the credit crisis, officials and congressional sources said. These sources briefed by Treasury officials said the program may initially raise $250 billion to $500 billion in public and private funds to offer low-cost financing to encourage investors to buy the toxic assets. An administration official said the proposal is still subject to a public review and may not take final shape for several weeks.

A second initiative will broaden the scope of a Federal Reserve program aimed at unclogging the markets for auto, student and other consumer loans. That initiative may expand to as much as $1 trillion, using $100 billion from the Treasury's rescue funds, and include aid for commercial real estate markets.

A third program would offer direct help to the nation's largest banks. The government plans to conduct a review of major financial firms to determine how much they may need. Any federal aid would come with conditions that would give the firms incentives to pay the money back as soon as possible. The review would determine the ultimate price tag of this program.

The primary goal of the bank-by-bank examination is to help regulators figure out whether these firms could withstand a downturn even worse than the current one, administration officials said.

This "stress test" would also help regulators determine whether the nation's major banks have enough capital to continue lending and help them in an effort to set uniform values for the toxic assets clogging their books.

"Right now, part of the problem is that nobody really knows what's on the banks' books," President Obama told reporters at a news conference last night. "Any given bank, they're not sure what kinds of losses are there. We've got to open things up and restore some trust."

If these large banks receive federal aid, they would be subject to tougher conditions than the Bush administration imposed and be required to submit reports to prove they are using the aid to do more lending.

They would be banned from using government funds to pay dividends above a penny or buy healthy firms until the government investment is repaid. Their chief executives would face compensation restrictions that would limit their annual pay to $500,000. Any compensation above that could come only in the form of stock that could not be sold until the federal loans are returned.

The initiatives require all of the nation's bank regulators to work together, which has not been an easy task, an official said. Geithner also plans to push regulators around the world in the coming days to adopt similar approaches to the spreading crisis in their countries, the official added.

Geithner's announcement was originally intended to include a fourth proposal, aimed at stemming the soaring rate of foreclosures. But officials said that plan will be unveiled in about a week. Congressional sources said this program would use about $50 billion in rescue funds, the low end of the range provided by the Obama administration last month.

James B. Lockhart III, director of the Federal Housing Finance Agency, said in an interview that the Obama team has developed the broad outlines of a proposal to stem foreclosures by adding incentives for borrowers and lenders to modify home loans that have fallen behind, perhaps by as little as a single month.

The foreclosure relief effort has taken more time to design. Lockhart said it would be a "more aggressive version" of the one launched by mortgage financiers Fannie Mae and Freddie Mac last year. But senior officials are still hammering out the details, he said.

Both lenders and borrowers have been frozen by the perception that the government may continue to unveil new and better modification programs, he said.

"The early returns show that we may need to be more aggressive" than plans already announced, he said. But the government also needs to send a message to lenders that its new approach would represent the "best and final" offer.

The Fannie and Freddie program allowed borrowers who were 90 days delinquent on a loan to have their payments lowered to 38 percent of their income. The loan could also be extended from 30 years to 40 years, and if that was not enough, the interest rate could be reduced to as low as 3 percent to make the payments more affordable.

Consumer advocates say the program was a good start in tackling the foreclosure problem but did not go far enough to help homeowners. For example, the effort did not include measures to cut the principal owed by borrowers whose home values have fallen below their mortgage loan amount. Another requirement -- that borrowers miss three payments before qualifying for help -- has been a troublesome issue, according to some consumer groups.

The government's new approach would make the terms more generous for both the borrowers and lenders. For instance, borrowers who missed only one payment might be able to qualify, Lockhart said. Lenders may be able to reduce payments to a lower percentage of a homeowner's income.

Officials are also planning to set national standards for when banks can legally modify a mortgage -- an important concern for loan servicers who can now only perform modifications that improve the value of the mortgage under the terms of their contracts with investors.

Lockhart said he hoped the new program would be attractive to loan holders, but he added that they had an obligation to increase their modification efforts.

"It is taking too long," he told an industry group during a speech in Las Vegas yesterday. "It is time to act."

The Treasury plans to address rescue funds going to the nation's automakers separately in the coming weeks.

By the most conservative estimates, the Treasury and Fed have already committed more than $1.4 trillion in loans, investments and guarantees to the financial system. Other estimates come to several times more.

Congressional sources added that if the programs developed by the Treasury were not successful, they expect the administration to return to Capitol Hill to ask for more rescue funds.

Obama addressed this issue at the news conference. "We don't know yet whether we're going to need additional money or how much additional money we'll need until we've seen how successful we are at restoring a sense of confidence in a marketplace that the federal government and the Federal Reserve Bank and the FDIC, working in concert, know what they're doing," he said.

Staff writers Binyamin Appelbaum in Las Vegas and Renae Merle contributed to this report.

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