Bailout plan sparks wide debate in Congress

What about homeowners who are stuck in these bad loans? Shouldn't they get help too?

This part of the debate has been under way for over a year, amid widespread opposition to bailing out homeowners who borrowed more than they can afford. Opponents argue that people who made bad choices should suffer the consequences. Further, people who were more prudent and didn’t get into trouble shouldn't have to pick up the tab.

So far, efforts to help homeowners have largely relied on voluntary efforts by lenders to work out new loans terms. But these solutions haven’t worked very well. Defaults and foreclosures are rising, and millions more homeowners face foreclosure over the next few years. Until the rate of foreclosures can be slowed, holders of the mortgage-backed paper at the heart of the problem will face continued losses.

"Why does this proposal have what I would consider a gaping hole to deal with foreclosure prevention?" asked Sen. Robert Casey, D-Pa.

Paulson said the plan could help speed the process of working out bad loans as the government buys up the debt backed by those mortgages.

Why not change bankruptcy law to let judges approve changes to more affordable loans?

Proponents of this idea say it would be the most effective way of clearing the system of bad loans, speeding up the process of getting the financial system back on a sound footing. Currently, mortgages are the one form of debt excluded from personal bankruptcy filings.

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Opponents fear that allowing judges to rewrite loans could make matters worse by making it even harder for future home buyers to get a loan. If lenders have to factor in the risk that a judge may change terms after the loan is written — a so-called "cramdown" — mortgages will be harder to get and cost more.

“It’s the one thing the Republicans and the president are going to lie across the railroad tracks for,” said John Taylor, president of the National Community Reinvestment Coalition.

How is this going to work? Who’s going to be in charge of spending all this money?

The initial proposal from the Treasury — a $700 billion program to buy up bad mortgage-backed debts that are clogging the financial system — was exceptional in both its brevity and scope. The three-page proposal would give the Secretary of the Treasury unprecedented power to spend an equally unprecedented pile of taxpayers’ dollars.

Some have proposed the creation of a new entity like the Resolution Trust Corp. that was established to clean up in the savings & loan mess in the late 1980s. Others say the financial crisis is too immediate, and that setting up a new agency would take too long. House Financial Services Committee Chairman Barney Frank, D-Mass., has suggested the New York Federal Reserve Bank — which already buys and sells billions of dollars worth of securities every day — might be tapped to do the job.

In his testimony, Paulson made clear the document was a starting point.

“(Oversight) is something we’re going to work on together,” he told the Senate panel.

How will the government come up with a price to buy these bad debts?

These mortgage-backed securities are so complex, no one knows what they’re worth — which means no one wants to buy them. But since the majority of mortgages will be paid back over the long term, these pieces of paper almost certainly will be worth more over the long term.

If the government buys these debts at the “fire sale price,” banks will have to take an even bigger hit as they write them off their books. If the government pays more than the debt is worth over the long-term, taxpayers will take the hit.

One proposal is a “reverse auction” in which banks offer up their lowest priced-debt and the government buys that first.

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