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Geithner Belatedly Backs Bill Allowing TARP Funds to Flow to Foreclosure Legal Services

Treasury Secretary Timothy Geithner (photo: TalkMediaNews via Flickr)

I’ve been writing consistently about the need to increase funding for legal services for foreclosure victims. As an investment, it certainly beats HAMP when it comes to actually helping borrowers avoid foreclosure. Moreover, states want to use federal block grants that come out of TARP for this purpose, but have to date been blocked by the Treasury Department. Now, Tim Geithner has changed his tune somewhat, backing a bill that would clarify the Treasury’s right to allow Hardest Hit Fund grant money to be used for foreclosure legal aid, but it’s unclear whether there’s enough time in the end of the legislative session to get this done.

But Treasury spokesman Steve Adamske says Geithner “enthusiastically supports” legislation from Rep. Marcy Kaptur (D-Ohio) that would explicitly grant Treasury the right to extend legal aid to foreclosure victims.

“I talked to Geithner, in fact, and Geithner agreed to support it,” House Financial Services Committee Chairman Barney Frank (D-Mass.) told The Huffington Post. “I’m told Bachus was for it, but Boehner objected, even though it’s no more money,” Frank added, referring to the incoming committee chair Spencer Bachus (R-Ala.) and incoming Speaker John Boehner (R-Ohio).

Treasury has approved $7.6 billion in foreclosure relief funds to states hit hardest by the housing crash. The legislation would allow those states to use the funding for legal aid programs.

The bill is expected to be considered Friday under a special legislative fast-track requiring a two-thirds majority for passage. The legislation faces a difficult path forward with Boehner opposed to it, even though his state features one of the highest foreclosure rates in the country.

Boehner’s spokesman raised the spectre of “groups similar to ACORN”, which no longer exists, as a recipient of this money. What it will actually go toward is legal services, defending borrowers who would otherwise have no way to afford access to the legal system.  [cont’d]

And this is a state’s rights issue. This bill wouldn’t mandate legal services money; it would allow states to elect, if they so chose, to use their Hardest Hit Fund dollars in the manner to which they see fit. In the typical conservative game, state’s rights mean a lot except when that goes against their ideological goals. Plus, it doesn’t cost a dime, as the money is going to the states anyway. They should get to decide how to use it.

It’s unclear that this legislation is even necessary. Treasury only reverts back to TARP rules when talking about how legal aid services aren’t allowable as recipients, though it showed wide latitude in handing out money to whatever bank wanted a piece previously. But Geithner is insisting on it. His “enthusiastic support” of the House measure belies the fact that there’s no Republican co-sponsor in the Senate, and moving the bill on unanimous consent in the dwindling days of the lame duck session is dubious. If Geithner supports allowing states to decide if foreclosure victims can have access to justice, all he has to do is sign off on it as Treasury Secretary.

The funding problem for foreclosure legal defense is “part of the banks’ strategy,” says Bubba Grimsley, a leading foreclosure defense attorney. Foreclosure defense lawyers have been extremely successful in uncovering robo-signing and a host of other irregularities in the foreclosure process, but they have to be able to sustain themselves:

“We’re shifting gears right now trying to find a model that works from a revenue standpoint,” says Bubba Grimsley a top anti-foreclosure attorney in Alabama. “We’ve stopped taking contingency cases. Something’s gotta change if we’re going to continue to fight. That’s a big part of the banks’ strategy, to shut down all of us who are operating on a contingency basis, because a lot of borrowers can’t afford a lawyer.” Contingency billing is an arrangement in which lawyers do not charge borrowers until a case is successfully concluded, rather than billing on an hourly basis.

This bill has more chance now than it did before, but hopes for eventual passage are sadly slim.

…I should mention that the vote in the House should come down today. It’s on the suspension calendar, which means it’ll need a 2/3 vote for passage. The bill is HR 5510.

UPDATE: Geithner has now written a letter to Rep. Kaptur explicitly supporting HR 5510. “This legislation would permit the funding of legal aid and other services to struggling homeowners through the Housing Finance Agency Innovation Fund for the Hardest-Hit Housing Markets program (“Hardest-Hit Fund),” he writes.

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David Dayen

David Dayen