- The Washington Times - Saturday, February 14, 2009

Three days after Treasury Secretary Timothy F. Geithner announced a $50 billion program to prevent home foreclosures, a powerful Democratic congressman who is deeply involved in the housing crisis suggested that $50 billion might prove to be just a down payment for a larger taxpayer-funded program.

“We may need more than $50 billion for foreclosure [mitigation],” Barney Frank, chairman of the House Financial Services Committee, told reporters Friday at a breakfast sponsored by the Christian Science Monitor. If there is not a high re-default rate after the $50 billion is injected into Treasury’s homeowner bailout plan, the government should consider spending more money to fund the plan, the Massachusetts Democrat said.

Mr. Frank said deteriorating home prices were a major cause of the plunging value of mortgage-related assets, which have blown huge holes in the balance sheets of many of the world’s largest banks.

And foreclosure mitigation is the best way to slow down home-price depreciation, he argued.

Since the housing bubble burst, home prices have been in free fall.

The S&P;/Case-Shiller Home Price Index for 20 metropolitan areas has plummeted more than 25 percent since its peak in 2006. Home prices in some areas have fallen much more, including 40 percent in Miami and 36 percent in Los Angeles. Last year, the U.S. housing market lost $3.3 trillion in value, according to a recent Zillow.com report. Nearly one in six homeowners with a mortgage is now underwater, meaning they owe more than their houses are worth, Zillow.com said.

Mr. Frank said his goal would be to reduce mortgage payments to 31 percent of a homeowner’s gross income. To the extent possible, that would require a write-down of the mortgage principal, which he said would lessen the likelihood of default because people would no longer be underwater.

To reduce mortgage debt or to otherwise modify an unaffordable mortgage, Mr. Frank said lenders would have to take a hit, the taxpayer would have to bear part of the burden and homeowner benefiting from the bailout would face “constraints,” which he did not identify.

Federal money will be necessary to buy down the mortgages to levels that are closer to market prices, he said. In areas where housing prices have plunged, the necessary write-downs could be extremely costly to banks, investors and taxpayers.

To the extent that troubled banks are required to reduce the value of their mortgages, their profits would be lower on a dollar-for-dollar basis. Banks that are losing money would see their losses rise and their already-inadequate capital further reduced. Setting off another round in a vicious cycle, more taxpayer funds might be required to finance additional capital injections into the nation’s troubled banking system.

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