Starting off his remarks to a key (and often contentious) hearing with members of the House Financial Services Committee by offering a concession on executive pay, Treasury secretary Henry Paulson clearly wanted to get off on the right foot with key legislators that have become increasingly critical of the Bush administration’s proposal to bail out key financial institutions. Paulson signaled openness to capping executive pay and other potential limits on pay in his opening testimony to key House members, including Committee chair Barney Frank (D-MA). Reportedly, the two had locked horns earlier over Democrats’ insistence that any bailout limit executive compensation in some form, although Frank later refuted such reports in a statement released Tuesday. For the mortgage industry, however, an exchange with Rep. Maxine Waters (D-CA) proved to be the most explosive of the afternoon; Waters questioned the Treasury chief over servicing advances and loan modifications, as well as who the Treasury would choose to manage assets. While officials have yet to specify what sort of assets the Treasury would purchase under the plan, it’s clear that private-party RMBS and CDOs backed by ABS will be part of the deal, as both are among the hardest-to-value in the current market. It’s less clear if the Treasury will look to buy whole loans as part of what Paulson has termed the “trouble asset resolution program.” Either way, however, both Paulson and Federal Reserve chief Ben Bernanke have made it clear that the government will manage assets, seeking to hold some to maturity if need be — and that led Waters to wonder aloud if the Treasury will look to intervene in future servicing of mortgages, to ensure a return on taxpayer investment. Paulson suggested that the answer was yes. “As the government owns more of these assets, we should have more leverage to push servicers for more in the way of modifications,” he said. He also suggested that the government was looking at ways to help servicers potentially circumvent the problem of servicer advances, which many say have limited many servicer’s ability to modify loans for a growing number of troubled borrowers, but did not provide further details on what options were currently under consideration. Waters also asked how the Treasury planned to select its vendors to manage the purchase and resale of assets under the bailout program, citing her concern for small and minority-owned businesses being shut out — a question that was met with distinct silence from both Paulson and Bernanke. “I didn’t hear you,” Waters said sarcastically, after waiting for a response. “I understand you concern, and we’ll address that,” was the only reply that came back from Paulson. For mortgage market participants — particularly those on the servicing and default end of the business — the fact that Treasury intends to exert some unknown pressure on servicing practices and is also looking to resolve the issue of servicer advances are huge issues. Large enough, in fact, that taken together both have the potential to change much of the landscape in mortgage servicing; the testimony also left the door open that Treasury may yet look to become involved in approving vendors on the default management side, as well. While questions remain over the approach, Paulson sought to make clear that the Treasury proposal was not a “spending platform” but an “asset management platform.” Paulson and Bernanke have argued the past two days that investors have valued many of the most complex mortgage-related instruments below a longer-term fundamental value they believe the government can realize to the benefit of taxpayers. Read Paulson’s prepared testimony >> Read Bernanke’s prepared testimony >>

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