Lawmakers at a recent oversight hearing expressed increasing frustration over Treasury Secretary Henry Paulson’s refusal so far to use any part of the $700 billion bailout package to directly stem foreclosures. When Paulson appeared before the House Financial Services Committee, members of both parties demanded an accounting of how the funds are being used.

Under the changes Paulson has made, the Troubled Assets Relief Program (TARP), originally intended as a mechanism for getting the most toxic assets off the books of banks, will not be used for that purpose at all. Instead, TARP has become a means for injecting capital into financial institutions under the Capital Purchase Program. There is talk of extending TARP far beyond mortgage lending to supporting credit card, auto, and student loans.

Rep. Barney Frank (D-Mass.), chairman of the committee and one of the architects of the compromise bailout bill, read several pages of the law to Paulson — an effort to persuade the Treasury Secretary that the legislation had been designed to help at-risk homeowners.

“The fundamental policy issue is our disappointment that funds are not being used out of the $700 billion to supplement mortgage foreclosure reduction,” Frank said. “I believe there is an overwhelming and powerful set of reasons why some of the money must be used for mortgage foreclosure” mitigation.

Paulson Responds

In his reply, Paulson hedged, saying he had not flatly ruled out the use of the bailout funds for this purpose. However, the Treasury has apparently put on ice a proposal by the Federal Deposit Insurance Corporation (FDIC) to use some of the money for an ambitious foreclosure prevention program. The FDIC has proposed a plan it says could reduce foreclosures by up to 1.5 million through a government loss-sharing program. The program would cover subprime loans that have been largely left out of the voluntary programs favored by Paulson.

“Today, the stakes are too high to rely exclusively on industry commitments to apply more streamlined loan modification protocols,” FDIC Chairman Sheila Bair said in her testimony at the same hearings. “The damage to borrowers, our communities, our public finances, and our financial institutions is already too severe.”

Rep. Maxine Waters (D-Calif.) specifically endorsed the Bair plan, calling for Paulson to adopt it promptly as part of TARP. “You don’t have a strategy to work on foreclosures,” Waters declared. “She does. Are you willing to support her plan?”

Paulson replied that TARP’s operations to date have, in fact, helped avoid foreclosures by keeping lending going. “Our actions to stabilize Fannie Mae and Freddie Mac, who are the biggest sources of all financing in America today … are critical. So there are real steps that have been taken to make a difference.” However, Paulson conceded, “More needs to be done … We are going to keep working on it.”

After the close of the hearing, Frank suggested Treasury was moving toward allocating some of the rescue fund to preventing foreclosures. “We’re in the process of trying to push them. I believe they are clearly closer to it as a result of the session we had before,” Frank said. “I am optimistic that something is going to happen.”