New Jersey Herald

Alternate Bailout Plan Offered

New Jersey Herald — Wednesday, October 1, 2008

Column: John Atlas and Phyllis Salowe-Kaye

We are in the worst economic crisis since the Depression. President George Bush's response does not address the needs of ordinary Americans worried about losing their jobs, homes, health care and retirement savings. Any bailout bill must help victims like Mr. X, a New Jersey Citizen Action member from Essex County, who is facing foreclosure of his home because of the predatory lending practices of his mortgage broker and Countrywide Mortgage. He had an almost perfect credit score when he got his original 30-year fixed rate mortgage with Countrywide at a 6 percent interest rate. A broker hounded him for months, encouraging him to refinance to lower his payments. The broker sold Mr. X a new Countrywide mortgage with an interest only, adjustable rate that contained a balloon payment. With monthly payments that are rapidly rising, Mr. X finds it increasingly difficult to stretch his salary to cover his expenses, but has somehow managed to make his mortgage payment on time every month. Unfortunately, because of the negative amortization of his loan, he now owes more than the house is worth. If he is able to refinance within the next year, he must come up with $10,000 in prepayment penalties to get out of the bad loan. However, a foreclosure moratorium and rate freeze will give him the time necessary to either negotiate a new mortgage he can afford now, or wait to negotiate until the prepayment penalty lapses in 2009.

Who and what caused the crisis? Who does the bailout help? Who will be the voice for ordinary people to make sure the bailout doesn't just help Wall Street? What reforms are needed to make sure this never happens again? Most experts agree that the government rush to deregulate the banking industry that began in the early 1980s and the failure to regulate the mortgage and investment banking industries triggered the Wall Street meltdown. Only after Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke insisted that President Bush act, did the President agree to try to rescue the economy from even deeper disaster. But what is the plan? The federal government will buy up tainted or rotten assets from financial firms and then resell them to private investors at a later date, hopefully after the value goes up. The plan would give Paulson a blank check costing every man, woman and child $2,333 — to buy and sell assets without further approval of Congress.

The Bush bailout is a corporate give-away, with no quid-pro-quos requiring companies to act responsibly in the future, limit outrageous executive compensation, or help ordinary homeowners keep their homes. The plan will give the administration a $700 billion check with no strings attached, which they'll hand over to the Wall Street firms that got us into this mess.

Paulson's plan calls for spending taxpayer funds to bail out his former colleagues on Wall Street, but does not devote a single penny to rescue American homeowners, like Mr. X, who were victimized by predatory lending. New Jersey homeowners facing foreclosure should be helped before the shareholders of big banks. We need to rescue Main Street, not just bail out Wall Street. New Jersey's Congressional delegation needs to stand strong by insisting on the following conditions for the bailout:

Public oversight — This kind of power contemplated by the bailout must not be centralized in a single individual — much less one who did not even stand for election. Any funds must be controlled by an independent entity, with consumers and workers given seats on its board.

Congress should be empowered to name independent monitors and approve all board members.

Protect the Taxpayer — The proposed bill would have taxpayers buying mortgages and other assets that nobody wants at prices far above their current value.

If a firm wants to auction off its rotten assets to the U.S. government, taxpayers should get equity in that firm equal to any amount paid in excess of the paper's value. This will insure that if the bailout works and the firms become profitable, taxpayers, not simply bankers, benefit from the upside.

Aid the victims, not just the predators — To protect victims of predatory loans, the bailout must impose a six-month moratorium on foreclosures and provide homeowners with a full array of financial and legal tools to modify their home loans. Where workouts are not feasible, people should be allowed to stay in their homes as renters.

Reform our regulatory oversight — Financial firms must be subject to meaningful oversight that will deter abusive practices that maximize profit but destroy neighborhoods. This would include extending the Community Reinvestment Act (CRA) to investment banks and insurance companies.

Any financial institution that benefits from the bailout must in return provide public benefit by investing in low- and moderate-income communities under provisions of CRA.

This crisis was caused because sensible regulations of the banking system that worked for dozens of years were dismantled or went unenforced. No bailout can go forward without requiring the necessary regulation to insure that this does not happen again.

John Atlas is founder and president of the New Jersey-based National Housing Institute. He was appointed to the Resolution Trust Corp. by President Bill Clinton. Phyllis Salowe-Kaye is a community organizer for and Executive Director of New Jersey Citizen Action, the state's largest consumer coalition.

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