Treasury Shifts Direction of Bailout Plan to Consumer Credit Markets

Nov 12th, 2008 @ 9:59 PM by Amber Nelson

The U.S. Treasury Department announced dramatic changes to the recently created $700 billion financial bailout package during a news conference Wednesday.

Congress passed the bailout bill last month with the understanding that the funds would go towards buying up bad mortgage debt from struggling banks and other lenders. Yet, Treasury Secretary Henry Paulson said that the “troubled asset relief program” or TARP will now focus instead on keeping major financial institutions healthy by buying up preferred stock. He also mentioned using TARP money to provide more liquidity in the consumer credit markets.

“Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets,” Paulson said. “Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.”

In defending the change of plans, Paulson explained, “Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions.”

While the switch in the direction of TARP came as disappointing shock to Wall Street, Paulson held his ground saying, “I will never apologize for changing an approach or strategy when the facts change.”

He did pledge to keep his promise to reduce the number of foreclosures on the horizon.”We are examining strategies to mitigate mortgage foreclosures. In crafting the financial rescue package, we and the Congress agreed that Treasury would use its leverage as a major purchaser of troubled mortgages to work with servicers and achieve more aggressive mortgage modification standards. Now that we are not planning to purchase illiquid mortgage assets, we must find another way to meet that commitment.”

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.

Posted in Mortgage Refinancing, Mortgages
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