WASHINGTON — Critics continued to argue Thursday that a bill designed to stabilize home prices should be shelved because Senate Banking Committee Chairman Chris Dodd received a deal on loans from Countrywide Financial Corp. five years ago.
Lawmakers raised questions about the deal as the Senate began debate on the bill, implying that Countrywide would benefit from the legislation. FreedomWorks, a conservative group, has asked for an investigation into the genesis of the bill to find out whether Countrywide or Bank of America Corp., which is buying the troubled mortgage company, were involved in its creation.
The debate has been characterized by more heat than light, so we offer the following frequently asked questions about how the bill began, Sen. Dodd's loans, and the scandal's effects on the legislation.
Whose idea was the bill?
A lot of players had a role in its creation, including Bank of America and Credit Suisse Group.
Early this year House and Senate banking leaders were scouring for any plans that would help borrowers at risk of foreclosure remain in their homes. Sen. Dodd initially focused on a plan floated by academics that would resuscitate a Depression-era agency to buy stressed mortgages.
But lawmakers found little political support for the idea of such direct government involvement, and Credit Suisse offered a more attractive alternative: letting the Federal Housing Administration consider more liberal underwriting standards to reduce mortgage debt.
B of A later put out a similar idea with more details and began having discussions about it with members of Congress, including House Financial Services Committee Chairman Barney Frank.
The industry wrote the bill?
No. Credit Suisse and B of A played a role in its creation, but most of the details were actually worked out by Capitol Hill staffers and employees of the Federal Reserve Board and the Federal Deposit Insurance Corp., according to sources. Those agencies provided technical expertise and input on how such an FHA program could be created.
Rep. Frank was further along than Sen. Dodd in terms of drafting a bill when they joined forces in March.
It is worth noting that Countrywide representatives were skeptical of the FHA plan, according to multiple sources at the time. The company argued that because the plan required substantial haircuts from lenders, to as much as 85% of the current market value, few lenders would want to participate.
Is the bill a lender bailout?
The bill will help lenders, but that does not necessarily make it a bailout. At its root, it is intended to help struggling borrowers and stabilize home prices, not assist lenders. But there is no good way to help the one without helping the other.
Exactly how much benefit lenders would get is open to question. The bill would create a voluntary program, and presumably banks would participate only if the program were a good alternative to foreclosure. Still, the bill would require a substantial writedown of the loan below current market values. Analysts were skeptical about how many lenders would want to go through with that except in the most extreme circumstances.
"The economics of implementing the refinancing are unlikely to benefit lenders much at all after they write down principal and work through the mechanics of the new loan," said Jim Vogel, the head of fixed-income research at First Horizon National Corp.'s FTN Financial Markets Corp. "Given the time it will take to implement the program, even if it's a success, we do not anticipate much overall benefit to home prices."
Then why are people saying this bill will help Countrywide?
In a word, politics. Those who already opposed the bill have seized on the Countrywide element as a reason to delay or kill it. The bill may help Countrywide, as it would any lender, but there is nothing in the bill designed specifically to assist that company.
What is at stake for Sen. Dodd?
On Tuesday he said he knew in 2003 that he was considered a VIP customer at Countrywide. But he asserted that he did not believe it had anything to do with his status as a politician, and that he would have rejected special favors outright. The Senate Ethics Committee is expected to begin an investigation into the allegations.
Despite the obvious undesirability of being embroiled in a real or perceived scandal, Brett Kappel, an ethics lawyer at Vorys, Sater, Seymour and Pease LLP, said the information that has come out so far indicates Sen. Dodd probably has little to worry about.
The first thing the Ethics Committee would consider is whether Sen. Dodd or Sen. Kent Conrad, who also received a VIP loan, got terms that were not available to the general public. Sen. Dodd said his rates of 4.25% and 4.5% were within the band of prevailing rates in 2003.
The investigation would continue only if the committee determined Sen. Dodd received special treatment, Mr. Kappel said.
What if he received special treatment?
The test would become whether Sen. Dodd was aware of it.
Sanctions for violations could range from a reprimand, such as a letter of admonishment; censure, which would be admonished publicly on the Senate floor (a fate that befell Sen. Dodd's father); or actual expulsion, which is required in cases of prosecutions for felonies like bribery and treason.
The bribery standard would be extremely tough to prove, Mr. Kappel said, since there would have to be evidence that Sen. Dodd received his loans in exchange for legislation that would benefit the company.
Because the loans were made in 2003 — before Sen. Dodd became the chairman and well before the housing crisis emerged — it would be nearly impossible to cast the loans as a bribe, Mr. Kappel said.
"The time between the giving of the quid and the conduct that constitutes a quo has to be quickly close in time in order for the Justice Department to make out a bribery case," he said. "Years apart would never fly as a bribery — never. It's like days or weeks, not even months."
Will it all blow over?
There is something else the Ethics Committee could do. Sen. Dodd could be cited informally for conduct that casts a negative appearance on the Senate. The standard typically applies to members who become involved in unseemly activities or those showing a perceived conflict of interest.
Judging by current information, Mr. Kappel said he believes that would be the worst that could happen to Sen. Dodd and is more likely to happen to Sen. Conrad, who has acknowledged conversations with Angelo Mozilo, Countrywide's former chief executive, about his mortgage. Sen. Dodd has said he never spoke with Mr. Mozilo or a top executive about his loans.
Did other lawmakers receive favorable treatment?
Countrywide did not respond to requests Thursday for information on its VIP rosters and whether any other members of Congress received such status.
But House Republicans, led by Rep. Jeb Hensarling of Texas, sent Speaker Nancy Pelosi a letter signed by 28 members, including Minority Leader John Boehner and other Republican leaders, asked for investigative hearings.
The letter sought hearings on the validity of charges, whether the described practices were widespread, the extent to which this scandal might have affected public policy, and what steps might be necessary to assure the public that elected officials do not receive such preferential treatment.
Will the Countrywide scandal sink the bill?
Probably not, though it could fail to be enacted for other reasons.
At the outset of debate on the Senate floor Thursday, Sen. Jim DeMint, R-S.C., asked Majority Leader Harry Reid to refer the bill back to the Banking Committee for analysis on how the legislation would benefit Countrywide.
Sen. Reid said he could not promise a vote on Sen. DeMint's request, but the majority leader did agree to work with him and eight other Republicans who expressed concerns about the bill's conflicts of interest.
Sources said Thursday they expected the chamber to pass the bill by next week with a veto-proof majority, despite the controversy and an unrelated veto threat Thursday from the White House.