WASHINGTON — House Financial Services Committee Chairman Barney Frank warned Wednesday that Congress will reject any request for the remaining Troubled Asset Relief Program funds if the Treasury Department does not agree to use some of it to finance a foreclosure prevention program.
He was among several lawmakers from both political parties who assailed a top Treasury official at a hearing on Tarp's implementation, arguing that the agency had blown through $335 billion with scant results.
Though President Bush could veto legislation constraining the Treasury, Rep. Frank said the market consequences would be dire.
"Given the extent to which the psychology of the investor community is a large part of our problems, then … I don't think that releasing the second $350 billion as a result of the president vetoing the resolution of disapproval would" do more good than harm, he said.
Some lawmakers put it more bluntly.
Rep. Maxine Waters, D-Calif., advised Neel Kashkari, the Treasury assistant secretary for financial stability, against seeking the funds before agreeing to adopt Federal Deposit Insurance Corp. Chairman Sheila Bair's plan to promote loan modifications.
"Please don't come here and ask for another penny because, if you do, I'm going to work 24 hours a day with the same people that I worked with to support you to make sure that they do not support giving you another dime," she told Mr. Kashkari.
Rep. Waters introduced a bill Wednesday that would codify the Bair plan, requiring the Treasury to give a loan guarantee to servicers that do systematic loan modifications. Though the original Tarp law allowed for such a plan, the Treasury has balked at implementing it.
"If he does not correct that, I will proceed with a bill placing into law a plan Sheila Bair wants to put in place," Rep. Waters said.
Mr. Kashkari defended the administration's record on foreclosure prevention, arguing that its investments in banks and other steps have helped prevent economic catastrophe.
"Imagine how many foreclosures you would have if we had allowed the system to collapse," he said.
He added that a voluntary loan modification plan announced by Fannie Mae and Freddie Mac would touch almost every loan.
Pressed by Rep. Al Green, D-Tex., to explain why the Treasury has not supported the Bair plan, Mr. Kashkari argued it would lead to more foreclosures.
"If you put insurance on an asset: If the borrower redefaults, does that create an incentive for the bank to move to foreclosure?" he asked. "We need to take a look at the incentives to make sure we help the borrowers."
Mr. Kashkari cited data that Comptroller of the Currency John Dugan released Monday saying more than half of borrowers that got loan modifications in the second quarter were late on their payments six months later.
FDIC officials have said that the loans were not modified in the same way as Ms. Bair's plan envisions. The Bair plan would also not give a government guarantee until a borrower successfully made payments for six months.
Democrats largely rejected Mr. Kashkari's reasoning, saying the Treasury's failure to adopt the Bair plan — or come up with its own — has cost it credibility.
"The refusal so far to use the money for that purpose has been, I think, a violation of the intent [of the law] and undermines the ability to get the votes in this Congress to do things in the future," Rep. Frank said.
But he was also on the receiving end of some criticism. Rep. Waters blasted Rep. Frank — normally an ally — for supporting the Treasury's efforts.
"I'm not going to cooperate with you anymore," she said to Rep. Frank. "You have allowed them to walk all over us. It doesn't feel good. These footprints on my back are just too tough."
After Rep. Waters said she hoped Rep. Frank would not respond, the Massachusetts Democrat shot back: "The gentlewoman does not have to worry about much further communication between us."
Lawmakers also attacked Mr. Kashkari over whether banks are lending the money being invested by the government.
"What are they actually doing?" Rep. Michael Castle, R-Del., asked. "Are they using this money to lend?"
Mr. Kashkari said preconditioning the capital investments would have been a mistake.
"We wanted to put the right economic incentives in there, but at the same time — thousands of banks across the country in all of our communities — it's very hard for us to try to micromanage and say 'this is how you should run your business' because each bank and each community is a little bit different," he said.
The Government Accountability Office released a report last week that criticized the Treasury for not even trying to track how banks were using the money. Mr. Kashkari said the agency is responding but the job is not an easy one.
"When you put a dollar into an institution, it's impossible to tell where that dollar goes," he said.
Still, Mr. Kashkari said the Treasury is working with regulators to try and gauge overall lending activity by banks that got capital injections.
"We are working on that very issue with the regulators," he said. "We are looking at quarterly supervisory reports to see if that sheds light on the issue. We've heard the feedback. We've got it; we are working on it."
Rep. Frank said he planned to convene a hearing soon featuring some of the banks that got capital injections to explain how they have used the funds.
The Oct. 3 law that created Tarp also created a congressional oversight board. This board, chaired by Harvard Prof. Elizabeth Warren, released a report Wednesday that was also critical of the Treasury.
The oversight panel's 38-page report posed 10 questions, including whether the Treasury's strategy is helping reduce foreclosures and how banks have used Tarp money so far.
The report also demanded more action from the Treasury on foreclosure prevention.