WASHINGTON — Treasury Secretary Timothy Geithner crisscrossed Capitol Hill on Thursday for appearances before the Senate and House banking committees, where he faced questions about reviving the housing market, regulation of community banks, U.S. financial stability and the European debt crisis.
In the morning, Geithner told the Senate Banking Committee that the federal government plans to lay out detailed plans in the next couple of weeks to allow more homeowners to refinance into loans with a lower interest rate.
The authority to establish such a refinancing program sits with the Federal Housing Finance Agency, an independent agency that oversees Fannie Mae and Freddie Mac. Geithner faced questioning from Democratic Sen. Jeff Merkley about whether the forthcoming refinancing program will affect enough families to have a major impact on the U.S. economy.
"I think it can make a big difference. And you're going to see from the FHFA director, maybe in the next couple weeks, very detailed proposals," Geithner told the Senate Banking Committee.
Geithner said the plan would be open to certain borrowers who owe more than their homes are worth. But that is also true of an existing government program that has not lived up to the Obama administration's expectations. Given past disappointments, Geithner said that the administration is being careful not to give estimates about the number of families that will ultimately benefit from the new refinance effort.
"As you've seen, we dramatically overestimated at the beginning of this, all of our housing programs, the number of people we believed could reasonably be reached and could qualify and be eligible. So we'll be cautious," Geithner said.
When Geithner arrived later before the House Financial Services Committee, he faced pointed questioning from Rep. Luis V. Gutierrez about the administration's failure to meet its housing goals. The Illinois Democrat pressed Geithner to explain how much money the government has spent on its mortgage modification program to help keep borrowers in their homes.
"A very small amount," Geithner said.
Gutierrez insisted that the administration has spent only $2 billion, compared with the $350 billion that banks received through the Troubled Asset Relief Program. "It could be $3 billion, but it's still a miserable amount of money."
Geithner said the reason the government has only spent a fraction of the $50 billion authorized for the Home Affordable Modification Program is because the number of people who are eligible is only a fraction of the number the administration expected.
But Geithner also faced tough questions on the burden the Dodd-Frank law has put on community banks.
Asked by Rep. Jeb Hensarling, R-Texas, about the issue, Geithner said many of the community bankers Treasury has heard from "recognize that they were left out of - if not privileged and advantaged in - the Dodd-Frank Act."
Geithner said that small banks were successful in getting carved out of many of the law's provisions.
"But their concern, some of them, is that they're under too much pressure from examiners to tighten standards beyond what they think is necessary," he said. "It's hard to know how much of that is true, but that's what they say."
But Hensarling was openly skeptical of such statements.
"It's clear that we are speaking to a different universe of community banks," he said.
Geithner also tackled one of the top issues facing regulators: the identification of systemically important nonbanks.
Speaking in the Senate, Geithner said the Financial Stability Oversight Council will meet Tuesday to consider a framework for determining which institutions are systemically important. If the framework is adopted by the council, it will then be made public, he said.
Geithner said that strong prudential standards are necessary for institutions that operate like banks, are large and leveraged, and are vulnerable to liquidity pressures.
"And the framework that the council is going to consider on Tuesday is designed to give the markets more guidance, more clarity about what types of institutions, what types of structures we'd want to consider, making sure that they are subject to these kinds of prudential safeguards," Geithner said.
Sen. Richard Shelby, the ranking Republican on the Banking Committee, sounded skeptical about the ability of the Financial Stability Oversight Council to predict threats to the financial system.
Geithner responded, "I agree and very much endorse your skepticism about the capacity of people who sit in my job or my counterparts on the council to look to the future and anticipate the types of sources of risk we face."
"And so, the basic strategy that underpins the design of this framework is not a strategy that depends on the wisdom and foresight of government officials," he said. "It's a strategy that relies on building much stronger shock absorbers, safeguards in the system."
In other Senate testimony, Geithner warned that the European debt crisis poses the largest potential threat to U.S. financial stability.
"As we've already seen, developments in Europe can have big effects on the United States economy, big effects on confidence, big effects on financial markets. And they have hurt growth here, and they have reduced expectations about future growth," Geithner testified.
At the same time, Geithner said that U.S. financial institutions, including major banks, have substantially reduced their exposure to the European nations that are facing the most pressure.
"Our direct financial exposure to these governments and their institutions is quite small," Geithner said, "but it's important to recognize the Europe is so large and so closely integrated with the U.S. and the world economies that a severe crisis in Europe could cause significant damage to growth here and around the world."
Geithner also sought to reassure senators that the American financial system is far safer than it was a few years ago.
In particular, Geithner noted that the ratio of common equity to risk-weighted assets at large banks is up to about 10%, from 6% at the start of 2009.
He said that at the largest banks, debt maturing in a year or less as a share of total liabilities is about 40% of its level before the financial crisis. And he added that the so-called shadow banking system has assets at roughly half the level as in 2007.
"Banks are funding themselves much more conservatively and are maintaining much larger cushions of safe and liquid assets," Geithner said. "These improvements are very significant. Together they represent much more progress on the path to a more stable and resilient financial system than has been achieved in the other major economies that were caught up in this crisis."
One of the biggest risks to the economy, Geithner said, is institutions afraid to take risks.
"That's a natural aftermath of crises when people are still scarred by the trauma of the crises," he said. "You need to make sure that people are willing to take risks. You don't want to lose that capacity."
