posted on Oct, 2 2008 @ 06:28 PM
Continued: Had there been floor amendments, Congress could have structured standards for utilization of debt insurance.
Had we followed regular order with an opportunity to propose amendments, consideration could have been given to my proposal, S.2133, which would have
authorized the bankruptcy courts to restructure interest and scheduling of payments. The so-called variable rate mortgages have confronted many
homeowners with the surprise that original payments, illustratively, of $1200 a month were soon raised to $2000 which resulted in defaults.
Individualized examination by the bankruptcy courts might show misrepresentation or even fraud to justify revising the interest payments and
rearranging the payment schedule. Or consideration could have been given to Senator Durbin's proposed legislation, S.2136, which would have
authorized the bankruptcy courts to reset the principal balance depending on the value of the home. I opposed that bill because I thought it would
discourage future lending, and in the long run raise the cost to homebuyers. But at least, following regular order, there would have been an
opportunity to consider Senator Durbin's proposal as well as my suggested legislation.
The legislation contains authority for the Treasury Secretary to compensate foreign central banks under some conditions. It provides that troubled
assets held by foreign financial authorities and banks are eligible for the Toxic Assets Recover Program (TARP) if the banks hold such assets as a
result of having extended financing to financial institutions that have failed or defaulted. Had there been an opportunity for floor debate, that
provision might have been sufficiently unpopular to be rejected or at least sharply circumscribed with conditions.
As a step to help keep borrowers in their homes, I proposed language found in Section 119 (b) of the bill to address the concern that some loan
servicers have been reluctant to modify home mortgage loan terms because they fear litigation from investors who hold securities or other vehicles
backed by the mortgage in question. The loan servicers have a legal duty to the investors to maximize the return on their investments. In testimony
on December 6, 2007, before the House Committee on Financial Services, Mark Pearce, speaking on behalf of the conference of State Bank supervisors,
discussed a meeting with the top 20 subprime servicers. He explained that "many of them brought up fear of investor lawsuits" as a hurdle to
voluntary loan modification efforts. Because the rescue legislation encourages the government to seek voluntary loan modifications, it is important
to remove any impediments to such modifications. To that end, the language provides a legal safe harbor for mortgage servicers making loan
modifications, if the loan modifiers take reasonable mitigation steps, including accepting partial payments from homeowners.
On reforms to prevent a recurrence of this crisis, we need to question whether the rating agencies adequately analyzed mortgage-backed securities
before issuing investment-grade ratings. These agencies appear to have failed. In July of 2007, when it became apparent that ratings issued by the
big three rating agencies-Moody's, S&P and Fitch- could not be relied upon, I urged the relevant committees to look into the ratings that those
agencies issued in recent years regarding mortgage-backed securities. Financial institutions that issue asset-backed securities obtain ratings for
such securities. The failure to issue reliable ratings misrepresented the facts and fed the ability of financial institutions to tout the value of
securities even though their value was declining. Congress and the regulators need to take up the rating agencies issue, and consider whether ratings
agencies that have utterly failed to detect and reflect the risks associated with the securities they were rating should be accorded any reliance or
role in our financial system. Some have suggested they should be regulated and we may need to consider that.
In addition, Congress and the regulators should review "off-balance sheet" transactions and leveraging. There should be a close examination on
whether banks are sufficiently transparent and providing accurate accounting that truly reflects risk and leverage. Similarly there should be a
review on Credit Default Swaps (CDS), which are privately traded derivatives contracts that have ballooned to make up what is a $2 trillion dollar
market according to the Bank of International Settlements. They are a fast-growing major type of financial derivative. Many experts assert that they
have played a critical role in this financial crisis as various financial players believed that they were safe because they thought CDS fully insured
or protected them, but the CDS market is unregulated and no one really knows what exposure everyone else has from the CDS contracts. Consideration
should be given to subjecting all over-the-counter derivatives onto a regulated exchange similar to that used by listed options in the equity markets.
Overleveraging has been a contributing factor in the turmoil that now threatens our financial institutions. We have seen a massive expansion of the
practice of leveraged financial institutions (banks, investment banks, and hedge funds) making investments with borrowed money. In turn, they borrow
more money by using the assets they just purchased as collateral. This sequence is continued again and again. The financial system, in its efforts
to deleverage, is contracting credit. They must guard against future losses by holding more capital. Deleveraging is leading to difficulty on Main
Street for individuals seeking to get a mortgage or buy a car. If a financial institution is able to unload its toxic assets onto the government, it
will again be able to resume its lending activities that are crucial for economic growth in the United States. Unfortunately, much of the financial
crisis has arisen from miscalculations of the risks involved with purchasing large amounts of securities backed by subprime mortgages and other toxic
assets. We now see a situation where we are not just talking about a handful of firms. This is a widespread problem that should be addressed by this
package and in future reforms of our financial regulatory structure.
In addition, the package crafted by Senate leaders includes two notable changes from the version that was rejected by the House on Monday. It
includes a tax package that was previously passed in the Senate by a vote of 93-2 on September 23, 2008, but has since been rejected by the House in a
dispute over revenue offsets. It includes tax incentives for wind, solar, biomass, and other alternative energy technologies. It also includes
critically important relief from the Alternative Minimum Tax, which threatens to raise the tax liability of over 22 million unintended filers in 2008
if no action is taken. Finally, the package includes a host of provisions that either expired in 2007 or are set to expire in 2008, including the
research and development tax credit, rail line improvement incentives, and quicker restaurant and retail depreciation schedules. I supported the
Senate-passed tax extenders bill because it struck a responsible balance on the issue of revenue raising offsets.
The package also includes a provision to temporarily increase the Federal Deposit Insurance Corporation (FDIC) insurance limit to $250,000.
Currently, the FDIC provides deposit insurance which guarantees the safety of checking and savings deposits in member banks, up to $100,000 per
depositor per bank. Member banks pay a fee to participate. The current $100,000 limit has been unchanged since 1980 despite inflation. This
approach is supported by both Senator McCain and Senator Obama, by House Republicans, and by the FDIC Chairman Sheila Bair. Raising the cap could
stem a potential run on deposits by bank customers, particularly businesses, who fear losing their money. Such fears contributed to the collapse of
Washington Mutual and Wachovia Bank.
Congress has been called upon to make the best of a very bad situation. Careful oversight of the authority given to the Treasury Department will need
to be undertaken, and a review of our regulatory structure will be necessary as we move forward.
Again, thank you for writing. The concerns of my constituents are of great importance to me, and I rely on you and other Pennsylvanians to inform me
of your views. If you require assistance with a federal agency, please contact my state office in your area. The contact information can be found on
my website at specter.senate.gov.