Members of a watchdog panel on Tuesday pressed Treasury Secretary Timothy Geithner on looming losses for banks and foreclosure relief for struggling homeowners, as he assured them that U.S. taxpayers are recovering their investment from the $700 billion financial bailout.
Geithner told the Congressional Oversight Panel at a hearing that banks have repaid about 75 percent of the bailout money they received, and the government's investments in aided banks have brought a return to taxpayers of $21 billion, in income from dividends, sales of warrants and stock, and fees from canceled guarantees.
Prepared Remarks by Secretary Geithner (pdf)
Congressional Oversight Panel Hearing on TARP
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For example, Geithner pointed to the government's sale of approximately 20 percent of its holdings of Citigroup common stock in April and May, totaling $6.2 billion, earning a profit of $1.3 billion.
He acknowledged there likely will be a partial loss from the rescue of giant insurer American International Group Inc., into which the government plowed $182 billion.
Geithner also said the auto industry has made significant structural changes, and the prospects that General Motors and Chrysler will repay the nearly $60 billion in bailout money have improved.
The oversight panel was created by Congress to oversee the Treasury Department's financial bailout program that came in at the height of the financial crisis in the fall of 2008. The panel has been critical of the politically unpopular program, known as the Troubled Asset Relief Program or TARP, which included aid to banks, AIG and the automakers. It is scheduled to expire on Oct. 3, and no new money will be available after that.
The panel's chair, Elizabeth Warren, underlined concerns that regional and small banks could be facing $200 billion to $300 billion in losses in the next few years on commercial real estate loans, and thousands of banks could fail as a result.
"This panel must know whether Treasury has carefully monitored the financial system to measure potential risks," Warren said. She criticized the department for not conducting additional stress tests of the financial system, as was done with the 19 biggest banks.
Panel members also criticized progress of the Obama administration's flagship effort to help people in danger of losing their homes, which is falling flat, according to numbers released Monday. More than a third of the 1.24 million borrowers who have enrolled in the $75 billion mortgage modification program have dropped out. That exceeds the number of people who have managed to have their loan payments reduced to help them keep their homes.
Last month alone, 155,000 borrowers left the program, which is administered by the Treasury Department - bringing the dropout total to 436,000 since the program began in March 2009.
Analysts expect the majority will end up in foreclosure and that could slow the broader economic recovery.
Richard Neiman, an oversight panel member who is New York's top banking regulator, said many families that relied on the government's program to keep their homes "may be left out in the cold." He asked Geithner why thousands of mortgage modifications were canceled.
Geithner said the homeowners involved were unable to prove income and therefore their eligibility for the program. Around 1.2 million people were given temporary modifications without proof of income as a stopgap measure, he said, and they were eventually required to provide the documentation. Many of them were disqualified as a result. The government "erred on the side of speed," he said.
Addressing the role of banks that collect mortgage payments, also known as loan servicers, Geithner said, "Servicers have done a terrible job of making sure they have done everything they can" to help struggling homeowners. Under the program, the services receive a total of up to $75 billion in tax incentives to reduce borrowers' monthly payments.
Geithner said AIG is making progress in restructuring its operations and divest businesses so that taxpayers can recoup their investment. However, he added, the government's investment "will likely still result in some loss."
The Congressional Budget Office has estimated that taxpayers will lose $36 billion. A large part of the money needed to repay the government will come from the sale of assets.
To date, 707 banks have received a total of $205 billion under the TARP program; $142 billion has been repaid. The government has received $17 billion in dividend payments from banks.
Geithner told the panel that TARP and other actions taken by the government, many of which he characterized as unpopular but essential, "have helped stabilize the financial system and restore economic growth."
He admitted that the economy is still going through "an incredibly difficult period," with millions unemployed and suffering from the damage of a deep recession.
"Nevertheless, thanks to the coordinated and forceful actions of Congress, the Obama administration, the Federal Reserve, the FDIC, and other regulatory agencies, the U.S. financial system is much stronger today than it was in early 2009," Geithner said.