Geithner’s Banking Bailout and Foreclosure Mitigation Plan

by Peter Vernon on Foreclosure Help, Stop Foreclosures

The entire U.S. banking industry and millions of foreclosure-troubled homeowners are awaiting Treasury Secretary Timothy Geithner’s bailout plan. They expect that his plan is vastly different from that of Henry Paulson, as Paulson’s plan largely failed because he focused only on helping financial institutions.

Treasury spokesman Isaac Baker said that Geithner is working with legislators to create an economic rehabilitation plan that would increase investments and create jobs. The plan would also help banks and other financial institutions so that they could provide credit to businesses and families.

Geithner has promised substantial changes in how the second half of the Troubled Asset Relief Program (TARP) funding would be spent. While Paulson succeeded in helping over 300 banks across the country, including billions of investments in AIG, Bank of American and Citigroup, he failed to require these institutions to provide loans to avert further foreclosures.

Geithner has not released the details of his bailout package. But he is known to be considering several options, as reported variously in the media. One of these is the bad bank rescue operation. This requires the formation of a government-funded unit that will acquire toxic assets. White House economist Larry Summers said Geithner will also tap private investors to contribute to the fund.

Another option is asset insurance. The Treasury Department will insure a big portion of lenders’ loan assets, as what has been done in 2008 with Bank of America and Citigroup. The third option is an enhancement of the Term Asset-Backed Securities Loan Facility (TALF) launched in 2008 by the Federal Reserve Bank. This TALF could be extended to include mortgage loans lost to foreclosures.

The other options are debt for equity swaps and additional capital investments in banks. But according to legislators, funding for these options would only be approved if banks are required to lend to reduce the number of foreclosed properties in the market.

During the election campaign and his pre-inauguration days, Obama promised homeowners and legislators that he would prioritize foreclosure mitigation measures. Surely, Geithner’s bailout plan will include the president’s demand.