WASHINGTON — House Financial Services Committee Chairman Barney Frank stepped up his criticism of the Treasury Department Monday, saying it was a major mistake not to direct some of the $700 billion financial bailout toward stemming foreclosures.
The Massachusetts Democrat has been an ally of the embattled Treasury Secretary, Henry Paulson, whose continual shift in positions has reduced his credibility on Capitol Hill.
But at an Office of Thrift Supervision housing forum Monday, Rep. Frank said Mr. Paulson's lack of action to prevent foreclosures is making the lawmakers who supported the bill appear disingenuous.
"The whole issue of foreclosure relief is the single greatest failure I think in public policy recently," he said.
The public is "skeptical" of government interventions, he said, and Treasury's failure to enforce its mandate to diminish foreclosures has caused many lawmakers to feel they were duped into supporting a Wall Street bailout.
"One of the arguments we used to get people to" vote for the bill "was that it would be helping us reduce foreclosures," he said. "There were members in Congress, not only from the Congressional Black Caucus but [also] the Congressional Hispanic Caucus, people from Ohio, people from California, people who represent communities particularly hit by this. They were assured that some of these funds would be used for foreclosure relief. The failure to date by Treasury to use any of those funds for foreclosure relief has undermined our ability to get the kind of votes we want for [reasonable] interventions."
Picking up on a concern expressed earlier in the day by Comptroller of the Currency John Dugan that borrowers whose loans have been modified are redefaulting (see related story), Rep. Frank said that a greater emphasis on principal reductions is needed.
"Principal reduction has to be one of the things we do because, as [Federal Reserve Board] Chairman [Ben] Bernanke has said, one of the best ways to get people not to default is to give them some equity on their homes," Rep. Frank said.
He also said that lawmakers had hoped to tackle that problem under the Hope for Homeowners program, which lets lenders reduce principal on mortgages borrowers cannot afford in exchange for a government guarantee through the Federal Housing Administration. But he acknowledged that the program had not worked as intended. "The problem with our bill is — and we've been talking to people about this — the fees are too high and the loan-to-value ratio, and we hope to adjust both of those," he said.
During his speech Rep. Frank suggested that, should Mr. Paulson request the rest of the troubled assets relief program funds, he is likely to face opposition from lawmakers.
"As far as I'm concerned the very least they would have to do would be, a lot of it would go for sufficient foreclosure reduction, including principal reduction, which is I think part of what we need, not all of what we need, to prevent redefaults," he said.
Rep. Frank joked that, when asked recently whether his views reflected those of the rest of Congress, he replied, "I'm one of the friendlier ones. Most of my colleagues think they'll need police protection if they even ask for the money."
If the Treasury were to request the rest of the funds, Congress would have 15 days to block them or attach conditions for their use.
Rep. Frank also defended the Community Reinvestment Act, which some Republican lawmakers have argued caused the housing crisis. He cited regulators, including Mr. Dugan, who have defended CRA.
"The Community Reinvestment Act cannot logically be blamed for the subprime crisis," said Rep. Frank. "I appreciate the repudiation of the notion … . If only entities covered by CRA made mortgage loans, we would not have anywhere near the problem we now have … . My own view is, it ought to be expanded, and we will be looking at that."
Rep. Frank also said he intends to pursue a tougher version of the underwriting bill the House passed in 2007 to prevent unstable subprime loans from being made. President-elect Obama said Sunday on Meet The Press that passing a new mortgage underwriting bill is a top priority.