First draft of $700 billion bailout offers no concrete solution for troubled homeowners

September 23, 2008

Over the past two weeks, market-rattling changes on Wall Street such as Lehman Brothers’ bankruptcy and the government’s $85 billion rescue of AIG shook investor confidence and saw stocks at their lowest since trading resumed post 9/11. Last week, Treasury Secretary Henry Paulson proposed a $700 billion bank bailout to revive the economy during what many are calling the worst decline since the Great Depression, citing the mortgage crisis as its “root cause”.

Without the bailout, Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee at today’s congressional hearing, “…unemployment rates will rise, more homes will be foreclosured upon…the economy will not be able to recover.”

Paulson said multiple times that tax payer interest is a top priority, but Senator Chris Dodd, banking committee chair, insisted the bill include these three conditions:

  1. Taxpayer investments are protected
  2. Those responsible for bad banking decisions are held accountable
  3. More assistance is provided for homeowners facing foreclosure

Though the rate of foreclosures is expected to rapidly increase within the next year, Paulson had no concrete answer as to why his $700 billion bill doesn’t address foreclosure prevention. At this point, help for homeowners under this bill is purely speculative. If the government buys up the bad debt backed by their mortgages it could help speed up loan workout processes, but there are no guarantees.

“Unfortunately, not every home will be saved,” said Paulson. “If a person can afford to stay in their home, we plan to do whatever we can to help them stay in their home.”

Fortunately for troubled homeowners, it is unlikely this bailout will pass as it presently exists. “What they have sent us is unacceptable,” said Senator Dodd of the Treasury’s proposal. Alternative plans have been mentioned, but their details have not been released.

Read more about today’s congressional hearing:

Bloomberg coverage

Associated Press coverage

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