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NEW YORK (CNNMoney.com) — The Bush administration wants to help beleaguered financial institutions – and prevent the financial crisis from getting worse – by spending $700 billion to buy up troubled mortgage securities.
But many struggling homeowners are asking: “Where’s my bailout?”
Democratic lawmakers have taken up their battle and say they will include more help for homeowners as part of the proposal, according to Rep. Barney Frank, D-Mass, who heads the House Financial Services Committee. Final details are still being hammered out, but it appears that the idea is gaining traction.
Here’s how the bailout could work: Once the Treasury Department takes hold of the securities, it can review the terms of the underlying loans and the financial shape of each homeowner. The department then could opt to modify the loans – by reducing the interest rate or principal balance – to affordable terms for borrowers.
The problem, experts said, is that the mortgages will be bundled into investments and sold. Therefore, the ownership of each loan is divided among all the investors who purchased the security.
And that complicates the process of helping individual homeowners.
“The No. 1 barrier to keeping people in their homes has been the challenge of these loans being in mortgage-backed securities,” said Ken Wade, chief executive of NeighborWorks America, a national community revitalization group chartered by Congress whose board is made up of bank regulators. “Counselors across the board say that is the major hurdle they are facing.”
Unless the government scoops up all the securities associated with a specific mortgage, they’ll run into the same problems in trying to modify the loans as the banks did, experts said. Often it depends on the terms in the securities contracts.
“Mortgages of questionable value have been sold into highly-complex securities, which have been carved up and sold to thousands of investors around the world,” said Kathleen Day, spokeswoman for the Center for Responsible Lending. “The government can’t put these Humpty Dumpty slices back together again because it won’t own or even control them all.”
