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More Help Coming To Clean Up Crisis
Programs for Toxic Assets, Mortgages

By Renae Merle and David Cho
Washington Post Staff Writers
Tuesday, September 29, 2009

The Obama administration is close to rolling out two initiatives aimed at addressing lingering problems from the financial crisis: A long-delayed effort to cleanse financial firms of their toxic assets, and a $35 billion plan to prop up state programs that help lower-income borrowers get affordable mortgages.

Announcements on both fronts could be made as early as Wednesday.

The toxic asset program is launching nearly a year after Congress approved the $700 billion financial rescue legislation that bore the name Troubled Assets Relief Program. The initiative was once envisioned as the signature program in the government's rescue of the banking system, but financial firms grew wary of the strings attached, and it was subsequently scaled back as the crisis abated.

Since July, the Treasury Department has been working with a group of private firms to build investment funds that would combine public and private resources to buy troubled bank securities. The firms plan to buy the assets at bargain prices in hopes that they will turn profitable over time.

This week, the first round of financing from the Treasury is slated to go out the door, sources familiar with the program said. The department plans to commit more than $2.5 billion to match dollar-for-dollar what has been raised by the private firms, the sources said. The investment funds can then borrow another $5 billion from the Treasury in a form of leverage intended to provide a further incentive to the private firms.

The total size of the program is expected to eventually reach $40 billion and can be expanded if needed, administration officials have said.

Another initiative will attempt to aid the fragile housing market by assisting state programs aimed at getting more low- and moderate-income or first-time borrowers into homes.

The proposal calls for the purchase of as much as $20 billion in bonds from state and local housing finance agencies and $15 billion in additional forms of liquidity, according to sources familiar with the plan. These agencies typically help about 100,000 borrowers a year and fund their operations by selling tax-exempt bonds, according to the National Council of State Housing Agencies. But the market has shrunk as investors shy away from the housing market. Several states have been forced to curtail their lending programs, according to the agency association.

The housing program would be funded through the Housing and Economic Recovery Act of 2008, which put mortgage financing agencies Fannie Mae and Freddie Mac under government control.

Treasury Secretary Timothy F. Geithner has not signed off on the plan and the details could change, according to sources familiar with the plan. The sources spoke on the condition of anonymity because the details have not been finalized. A Treasury spokesman declined to comment.

The housing plan, which surfaced in media reports on Monday, is the administration's latest attempt to provide relief to the housing market, which is struggling to stage a recovery. After rising for four months, sales of existing homes dipped last month. And economists worry that the Nov. 30 expiration of an $8,000 tax credit for first-time home buyers could put a damper on the market.

Financing through state housing agencies fell out of favor during the housing boom when many low-income homeowners could easily get a subprime loan, said Guy Cecala, publisher of Inside Mortgage Finance. The programs also could be cumbersome for borrowers, requiring them to get pre-purchase counseling, for example. But "in the current environment, it's a real popular program again. Some offer no-down-payment loans" through a variety of programs, he said.

Washington area housing finance agencies are among those that have been hurt by the weak market for state bonds, which provided funding for their programs.

The Virginia Housing Development Agency stopped issuing bonds in December 2008 "due to market conditions adverse to housing" and slowed production of new loans, according to an agency statement. Homeownership loans financed by the agency fell 34 percent, to 4,259, in its last fiscal year.

The District's Housing Finance Agency restarted its mortgage program in 2005, helping 183 home buyers secure a mortgage in 2008. But the agency expects to help fewer buyers this year, said Harry D. Sewell, executive director of the District of Columbia Housing Finance Agency.

Traditionally, the D.C. program has offered mortgages at an interest rate below the overall market, Sewell said. But the city cannot currently offer such deals because of the weak market for agency bonds. Most recently, the D.C. program has offered an interest rate of 5.25 percent. The average interest rate last week for a 30-year, fixed-rate mortgage was 5.04 percent, according to a Freddie Mac survey.

"It's hurt our ability to raise capital cheaply," Sewell said.

In Maryland, the number of loans issued to low- and moderate-income first-time home buyers peaked at about 4,000 in 2007. It fell to 2,900 last year, and the total is on a pace to come in even lower this year, said Clarence Snuggs, deputy secretary of the Maryland Department of Housing and Community Development.

Federal assistance would inject some stability into the market, potentially making the sale of these housing-agency bonds easier, Snuggs said. He said he had not seen the Treasury plan.

"It's been tough out there. The unpredictability has been the worst part. Anything that would add some stability would be a good thing," Snuggs said. The agency's ability to serve the financing needs of Maryland home buyers "is dependent on our ability to get the financing we need in the marketplace."

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