A weekend spent wrangling over the details of a historic financial bailout of some of the nation’s largest financial firms, saddled with bad mortgage debt and related securities, yielded a deal that most of HW’s sources said Monday morning they expect to pass a close vote in the House of Representatives later Monday afternoon. The bailout proposal will essentially nationalize much of the nation’s outstanding mortgage debt — at least, any remaining mortgages not already owned or insured via Fannie Mae (FNM), Freddie Mac (FRE), and Ginnie Mae. The government seized both Fannie and Freddie roughly one month ago. Lawmakers arrived at a final bill on Sunday. As HW has reported consistently throughout the negotiations, the final bill does not include provisions that would allow judges to “cram down” a borrower’s mortgage debt in bankruptcy proceedings; conflicting information regarding the cram-down provision’s fate had circulated via trade media outlets last week. Proposed cramdown provisions were cut from the proposal during negotiations between Congressional Democrats, who supported the measure, and Republicans, who have strongly opposed it. The bill splits the Treasury’s sought-for $700 billion into $350 billion parcels, with the second $350 billion made available unless Congress chooses to vote against funding it. It also provides for strong executive compensation limitations, pushed for by Democrats — including so-called “claw backs” that would see previous bonuses pushed back if based on misleading financial reporting — and would give the Treasury warrants to preferred equity on nonvoting common equity in the firms participating in the bailout program. Read the full bill >> Read a one-page summary >> Read the bill section-by-section >> The legislation does not specify how the Treasury will price assets, or how it will select assets to purchase; it also does not specify how the government will select and hire asset managers for the mortgages and mortgage securities it purchases. One of the key tenets of the bailout proposal is homeownership preservation — a summary of the legislation notes that not only is the Treasury required to modify troubled loans “wherever possible,” but that the proposal would expand the recently-passed Hope for Homeowners program that saw the Federal Housing Administration gain the authority to underwrite as much as $300 billion in new mortgages for troubled borrowers. (Some might argue that such “expansion” is tantamount to “loosening of underwriting standards,” but that’s for a separate story). The bill provides authority for the government to allow tenants to occupy a foreclosed property under the terms of a pre-existing lease, and directs the Treasury to actively seek to acquire mortgages that “will improve the ability of the Secretary to improve the loan modification and restructuring process” — language that sources told HW means that Treasury will look to acquire the worst-performing mortgages. The bill also would give the Treasury wide-ranging authority to use loan guarantees and taxpayer-funded credit enhancement to facilitate loan modifications on mortgages that are part of a securitized pool. President Bush pushed for the bill’s passage early on Monday, suggesting that the passage of the bill was critical to the country’s ability to “remain the most dynamic and productive economy in the world.” “Congress can send a strong signal to markets at home and abroad by passing this bill promptly,” the President remarked at a press conference Monday morning. “Every member of Congress and every American should keep in mind: A vote for this bill is a vote to prevent economic damage to you and your community.” Not everyone agrees that the bailout is needed, however; and most experts suggested to HW that the legislation faces a stiff test in a key House of Representatives vote Monday. House Republicans pushed an alternative proposal last last week. “The bailout proposal now before Congress does not deal sufficiently with the issue of solvency and ensures that the US banking system will continue to deflate and de-lever, meaning that less and less credit will be available to the private economy and the recession is likely to be far longer and deeper,” wrote Christopher Whalen, co-founder of Institutional Risk Analytics, in a recent letter. “The present situation in the US economy is not nearly as bad as the 1930s, but if Ben Bernanke and Hank Paulson don’t soon refocus their attention from liquidity to solvency of depository institutions, the US economy could end up in a situation that is much worse that the 1930s given the huge inflation of asset values seen over the past decade.” Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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