Democratic Leaders Justify Gov’t Buying Bad Mortgages and Easing Their Terms

By Nicholas Ballasy | September 30, 2008 | 5:03 PM EDT

( - The proposed $700 billion economic bailout package--defeated in the House Monday but under ongoing negotiation for a probable new vote--includes sections that would permit the federal government to lower the interest rate and the principal of the loan on troubled mortgages.
That part of the bill, Sections 109 and 110, would essentially allow the Treasury Department to pick and choose who could get lower rates and a lowered principal. The proposed law reads: “In the case of a residential mortgage loan,” modifications on the loan “may include: (A) reduction in interest rates; (B) reduction of loan principal; and (C) other similar modifications.”
In other words, the law mandates that the secretary of the Treasury work to bailout people who bought a house they could not afford by changing the terms of their mortgages or by providing them with other financial guarantees.

When asked about this proposal by at a press conference Monday, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, and Rep. Rahm Emanuel (D-Ill.), chairman of the Democratic Caucus, said the idea was a good one that they strongly supported. 

The following is a transcript of the question-and-answer session from the press conference. “Speaker Pelosi, section 109 of the proposed bill entitled ‘Mortgage Mitigation Efforts’ says in the case of a residential mortgage loan, modifications can be made, including a reduction in interest rates and loan principle. Should this section be in the bill or not?”

Rep. Barney Frank (D-Mass.): “Oh, I think it is absolutely essential that section be in the bill. It was not objected to by the secretary of the treasury. What we are saying is that the cause of this whole crisis was foreclosures, and we have said this: This is now the federal government as the owner. That does not apply to the federal government telling another owner of the mortgage what to do. This is the federal government saying, ‘we own these mortgages, and we believe it is in the national interest and the interest of the economy to reduce the – to reduce the principle.’
“By the way, it is an embodiment in that bill of the principle that we put into the previous bill that passed, only there – we were trying to induce private mortgage holders to do it. It certainly wouldn’t be reasonable to try to get the private mortgage holders to do it, and then when we hold the mortgage to not do it ourselves.”

Rep. Rahm Emanuel (D-Ill.): “Let me add one other thing. That very section was, as you improve the ability of people to pay their mortgages, the values of the very securities you had, improved in value, which is making sure taxpayers are getting a return on their investment. So it is not just out of a sense that they, we’re troubled, and we’re just trying to help them at a troubling hand.
“If you help people who were paying on those mortgages stay in their home and continue to pay, the value of what the government then owned increased in value. It was helping, in fact, what we were doing – not only keep people at home but help the taxpayers get a return on their investment. It is exactly what you would want to have happen.”