News Release: Law

Sep. 29,  2008

Emory's Alexander Asked to Weigh in on Defeated Bailout Bill

As Congress wrestled over the weekend with the now defeated financial bailout bill, Emory University housing expert Frank Alexander was asked to look at the impact of the proposed legislation on easing the crisis in the residential real estate market. Would this bill help ease this country's mortgage and home ownership crisis?

Alexander says the answer is no, but the reason is complex.

"The proposed legislation has two purposes," says Alexander. "One is to deal with the liquidity and credit crisis; the other is to deal with the mortgage crisis and homeownership preservation concerns.  If this legislation is passed and Secretary [Henry L.] Paulson acquires large investments in mortgage-backed securities, he most likely would not have the authority to address the home ownership preservation activities contemplated by the statutes."

"The reason this bill wouldn't help the mortgage crisis is not the wording of the statute, but the nature of the product that would be acquired by the Secretary of the Treasury," Alexander explained in a letter dated Sunday, Sept. 28, to Rep. Dennis Kucinich, chairman of the House Domestic Policy Subcommittee.

"When and if the Secretary elects to acquire the mortgage related asset of any single financial institution, the Secretary will not be acquiring a portfolio of whole loans, or even a controlling interest in a securitization of loans," wrote Alexander.

And that is the heart of the problem:

"When the Secretary buys a fractional interest in large pools of mortgage backed securities, he is not acquiring controlling interest of the mortgages themselves," Alexander explains. "So he may be purchasing a five, 20 or 30 percent interest in a mortgage backed security, but that minority interest is not necessarily sufficient authority to modify the loans."

Or as Alexander said in his letter: "The Secretary will lack the authority to authorize, require or even permit a program designed to encourage or facilitate home ownership preservation or foreclosure avoidance actions."

The bill in its most recent form, says Alexander, "has many provisions that make it far superior to the bill that was submitted on behalf of Secretary Paulson eight days ago. I probably would have voted for the bill today."

But in order to address home ownership preservation, says Alexander, the Troubled Asset Relief Program outlined in the legislation should have as one of its goals the acquisition of Troubled Assets, "which will provide the Secretary with a controlling or majority interest in the underlying pool of whole mortgage loans. In such a context the Secretary will be in a position to implement the Homeownership Preservation goals of this legislation."

Alexander, founding director of Emory's Center for the Study of Law and Religion (CSLR), earlier this spring gave testimony before a congressional subcommittee on how federal funds could be targeted to neighborhoods most affected by rising rates of vacant and abandoned properties.


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