WASHINGTON — Senate Banking Committee Chairman Chris Dodd and Treasury Secretary Henry Paulson sparred Tuesday over who was in the best position to resolve problems in the credit markets, with each trying to give the responsibility to the other.
In a press conference, Sen. Dodd repeatedly called for action, but he declined to take any himself. Instead, he emphasized that problems should be handled by Federal Reserve Board Chairman Ben Bernanke and Mr. Paulson, both of whom met with him Tuesday morning.
"There's a need for some action here," Sen. Dodd told reporters after the meeting. "Clearly there are steps that can be taken to minimize this problem from becoming broader. … The ball is really in their court."
He made his comments after Mr. Paulson went on television to reject the Connecticut Democrat's demand to allow the mortgage portfolios at Fannie Mae and Freddie Mac to grow. The Treasury chief said a potential solution to problems in the jumbo market is raising the conforming loan limit for the government-sponsored enterprises — but he said doing so was a legislative matter beyond his control.
"Where there have been issues, there have been issues in the nonconforming jumbo market and in the subprime market," Mr. Paulson said in an interview on CNBC. "In order for the GSEs to participate in the jumbo market, or in the riskier market, where loan-to-value is high, this takes legislation. … Raising the cap on what a conforming loan is is a legislative solution."
He added: "When you look at the jumbo market, that is something we are looking at."
Representatives from the Treasury and the Fed declined to comment on the meeting, but the impasse left Washington's next move in response to the market turmoil unclear. Much of the meeting seemed to have consisted of discussions between Sen. Dodd and Mr. Paulson.
But Sen. Dodd said that he left the talk impressed with Mr. Bernanke, and that the Fed chief is committed to "using all the tools available to him" to ease the financial markets.
The discussion seemed to have been less fruitful with Mr. Paulson, who earlier in the morning dismissed hopes that the Office of Federal Housing Enterprise Oversight, which regulates Fannie and Freddie, would ease the growth restrictions on the mortgage portfolios. "Right now, without new legislation, the GSEs, Fannie and Freddie, participate in the conforming prime mortgage market," he said in the interview. "That mortgage market is performing very well. Raising the cap doesn't do much of anything."
Mr. Paulson's refusal to budge on the portfolios left Sen. Dodd feeling the Treasury was not fully engaged in the problems facing the credit and mortgage markets.
"I'm still concerned that the Treasury does not appreciate the importance of this issue," the senator said. "There are steps that can be taken... that can minimize this problem from spilling over into other sectors of the economy."
Sen. Dodd also criticized the Treasury for being upbeat while noting that a full recovery from the credit crunch would take time.
"I'm concerned that you're getting sort of a dual message here. One, that this is going to take a longer time to fix, but everything's sort of hunky dory," he said.
However, Mr. Paulson's comments left the door open to supporting an increase in the conforming loan limit, and he said that Sen. Dodd could help ease the credit crunch by passing legislation to reform GSE regulation. That bill includes a provision that would inject liquidity into the market by allowing Fannie and Freddie to buy mortgages that are 50% more expensive than the median home in high-cost areas.
The current conforming loan limit bars the GSEs from purchasing mortgages of more than $417,000.
Mr. Paulson's stance on the conforming loan limit marks a reversal for the Bush administration, which argued in a statement of administration policy in May that higher limits would pry the GSEs away from their mission of providing liquidity for low- and middle-income housing.
House Financial Services Committee Chairman Barney Frank championed the fight to raise the conforming loan limit in the House this year, and has urged the Senate to go even further.
"It now is clear we underestimated in the House bill how far we should raise the conforming loan limit," he said in a press release.
Though Sen. Dodd said he is not opposed to increasing the conforming loan limit, he showed little interest in the subject, likely because many Senate Republicans oppose the idea. Instead, he said OFHEO should take the first step and ease the portfolio restrictions.
"I think some confusion exists here that somehow Congress is responsible for not acting on GSE reforms to deal with the portfolio cap issue," he said. "That is not something Congress has to do."
Sen. Dodd spent much of his 20-minute press conference emphasizing the severity of the problem while shifting responsibility outside the halls of Congress. "If we don't deal with this … this matter could spill over and become more serious," he said.
But he would not commit to any legislative action beyond reforming the Federal Housing Administration, and he deflected a question on why the Senate has failed to respond to the subprime mortgage crisis.
"The Fed is moving on this," he responded. "We have [Home Ownership and Equity Protection Act] legislation passed in 1994 which mandated that the Fed assume responsibility in dealing with deceptive and fraudulent practices. … They tell me we'll have those regulations in place by this fall. If that's the case, then I'm satisfied this will be done."
Because the Fed is still drafting a rule, Sen. Dodd said introducing legislation to rein in abusive lending would only complicate matters. "Simultaneously, we'll be looking at the possibility of legislating in this area, but I don't want to create more confusion by taking that action prematurely," he said.
