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Earlier this week lawmakers and the Treasury clashed over the foreclosure issue. The bone of contention between Congress and Henry Paulson was over what should be done with the $700 billion bail out package. The lawmakers are aggressive in their demand that the money should focus on stemming the tide of foreclosures hitting the nation without any sings of abatement.

Paulson was under severe questioning at a hearing of the House of Representatives Financial Services Committee. Paulson parried by saying that the bailout measure was not “a panacea for all our economic difficulties.” He opined that by investing in financial entities the entire system would get rejuvenated. He argued, “The rescue package was not intended to be an economic stimulus or an economic recovery package. It was intended to shore up the foundation of our economy by stabilizing the financial system.”

Members of Congress alleged that the Treasury was changing tactics each passing day. Paulson had to agree that he had not totally forgotten the idea of using the funds to help the foreclosure victims but he had “reservations” about the suggestions being made by the FDIC. The chairperson of the panel, Barney Frank (Democrat) reminded Paulson that the mortgage relief was one of the important options in the bailout bill that was passed by the Congress. Frank stressed, “The fundamental policy issue is our disappointment that funds are not being used out of the $700 billion to supplement mortgage foreclosure reduction. There, I believe, is an overwhelmingly … powerful set of reasons why some of the … money must be used for mortgage foreclosure.”

At this hearing the chairperson of FDIC, Sheila Bair was also present. She said that it was “essential” that the Treasury comes forward with loan guarantees and financial help to slow down the pace of foreclosures. She warned that in the forthcoming year about 4 to 5 million mortgages would be at risk from foreclosures if something were not done immediately. FDIC plan suggested the restructuring of loans in such a way that lenders would be encouraged. Government guarantee would cover probably losses. The federal government would have to bear the cost for this plan to the tune of $24 billion. Bair clarified, “We are clearly falling behind the curve. Much more aggressive intervention is needed if we are to curb the damage to our neighbourhoods and broader economic health.”

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