Congress needs to pass legislation that "unlocks" securitized trusts so servicers could sell distressed mortgages to the Treasury Department for restructuring, according to a former Treasury official in the Clinton administration.

Michael Barr told a House panel that the Real Estate Mortgage Investment Conduit statute could be amended so that MBS investors don't face a tax penalty when loans are sold to Treasury, which is administering the Troubled Asset Relief Program (TARP). "We need to free servicers from the conflicting requirements and give them an incentive to sell mortgages to Treasury for refinancing and foreclosure avoidance," he testified.

Barr is a law professor and a senior fellow at the Center for American Progress, a liberal think tank. He served as a special assistant to former Treasury secretary Robert Rubin and as Treasury deputy assistant secretary for community development (1997-2000). His testimony could signal options that the President-elect Barrack Obama's transition term is considering.

Barr also supports a Federal Deposit Insurance Corp. plan to guarantee modified loans. "FDIC has proposed a plan to use guarantee authority, and the [Bush] administration should implement it," he said.

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