Government Shifts Focus to Homeowner Stability

Now that the Treasury Department aims to use the remaining $400 billion of the bailout funds on debt-entangled consumers and the institutions that can help them reduce their financial burden, less emphasis will be placed on relieving investment banks of devalued securitized mortgages.

In a press briefing Wednesday, Treasury Secretary Paulson said that the Treasury plans to support the capital needs of the non-bank financial institutions that are not eligible for the current capital program, increase availability of car loans, student loans, and credit cards, and achieve more aggressive mortgage modification standards.

This new edict could be beneficial to credit card companies such as American Express Co., which won approval from the Federal Reserve to become licensed as a bank holding company. Although American Express owns two banks already (American Express Centurion Bank, an industrial loan bank chartered in Utah, and American Express Bank FSB, a federal savings bank) this latest approval will give them greater access to bailout funds, allow them to lend more freely, and possibly acquire a deposit-taking bank.

“Given the continued volatility in the financial markets, we want to be best positioned to take advantage of the various programs the federal government has introduced or may introduce to support U.S. financial institutions,” said Kenneth I. Chenault, chairman and CEO at American Express.

Restructuring debt on Main Street instead of Wall Street is a sentiment that has already caught on in the banking community. On Tuesday, Citigroup Inc. announced they will increase assistance to homeowners who are not currently behind on their mortgage but who are likely to face extreme economic distress.

“In today’s economic environment, Citigroup continues to build on its longstanding efforts to develop new ways to help our customers remain in their homes,” said Sanjiv Das, CEO of CitiMortgage, in a statement.

Citigroup increased its commitment to loss mitigation by reaching out to 500,000 families whose mortgages

the company owns. Since 2007, the company has already helped to avert 370,000 foreclosures, representing $35 billion in loans. The company expects this new attempt will result in workouts of an additional $20 billion in underlying mortgage balances.

“It is better to provide debt relief for the homeowners. In the most recent [economic crisis] corporations engaged in the process of pushing loans on potential homeowners,” says William Darity, a professor of economics at Duke University.

Now that the Treasury is shifting gears away from these companies, some of them may actually go under, Darity says. “We need that to happen because that creates a disincentive on the part of banks misbehaving again. The financial sector corporations that created the crisis ought to pay a price, and they should pay a more severe price than the individuals that took out home loans.”

Since many of the problems with the economy revolve around the housing crisis, these measures may be the remedy to head off further problems.

“Property values will decrease further if foreclosures continue to run rampant,” says Muhammad Mustafa, a professor of economics at South Carolina State University. “Freezing foreclosures will have a positive impact on the economy, increase property values, and boost consumer confidence.”

Citigroup’s efforts represent a new trend that banks and debtors are utilizing to assist homeowners who have over leveraged their income. Based on Paulsen’s statement Wednesday, this may be a trend that the government might reward.

“Although the details of any regulatory reform and bailout have not been spelled out, the philosophical underpinnings are clear: Any further government help to specific industries or firms from the government will require concessions by those industries or firms via greater regulation or givebacks,” says Samuel Myers, an economics professor at the University of Minnesota. “In the case of lending, I think anticipation will be immediate support for homeowners via freezing of foreclosures and delayed payments or repackaged loans.”

Myers believes that blacks will benefit from modified mortgages and debt assistance programs more so than the general population, since they were disproportionately targeted by subprime lenders. The growth of the higher-priced subprime loans is believed to have contributed greatly to an increase in mortgage defaults and foreclosures. According to the Home Mortgage Disclosure Act Data, black people had the highest average spread on subprime rate loans in 2005 and 2006.

The practice of banks helping homeowners is not new and is often undertaken on a case-by-case basis, explains Myers. “The problem is that African Americans rarely have been offered these options to foreclosure. What is new is that by making the practice uniform, African Americans will disproportionately benefit,” he says. “Interestingly, it will also narrow the disparity in lending outcomes. This is one instance when good economic policy also has the advantage of being fair and equitable.”