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Paulson and Bair's Dueling Foreclosure Strategies

Treasury Secretary Henry Paulson and FDIC Chairwoman Shelia Bair battled it out on Capitol Hill today over competing plans for the $700 billion Troubled Asset Relief Plan funds.

House of Representatives Financial Services Committee Chairman Barney Frank (D. Mass.) bashed Paulson for shifting his plan for the bailout funds, investing the money in healthy banks rather than buying the troubled mortgages he originally said he would. “The fundamental policy issue is our disappointment that funds are not being used to supplement mortgage foreclosure reduction,” Frank said.

Bair, meanwhile, told lawmakers the money should be used to prevent foreclosures. Her plan is to use some of the money to encourage banks to renegotiate loans by guaranteging that lenders get some money back if the loans later fail. Bair says her plan could prevent 1.5 million foreclosures.

Federal Reserve Chairman Ben Bernanke said he supports Bair’s approach. Paulson defended his strategy saying the direct investments were needed to shore up the financial system and the best way to support housing prices is for banks to now use that federal money to provide low cost loans.

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