Treasury Secretary Timothy Geithner gave a fairly strong endorsement to Jeff Merkley’s plan to set up an Home Owners Loan Corporation (HOLC) type authority to purchase and refinance current underwater mortgages, and plans to work with him to set up pilot programs by the end of the year.

Testifying before the Senate Banking Committee today, Geither was asked by Merkley about the plan, which I profiled here. Geithner’s response was surprisingly positive:

We share your view completely. As you know the president has been very supportive of legislation in that context. Your own leadership in that context we fully support. We like the way you designed it. I think it would be — it’s good economic policy, good for the country for that to become law just for the reasons you said. It’s not just a fairness question, but it would help reduce the remaining pressures that housing is putting on the economy as a whole. Very good economic case for doing it.

You could do it in ways that doesn’t leave the taxpayers exposed to any meaningful risk in that context. So we’d be very supportive of progress in that area.

I’m so jarred by this that I almost feel the need to reassess Merkley’s policy. But he told me that he designed it to be broadly acceptable. The policy forces write-downs on the banks to 140% LTV (Loan to Value) on seriously underwater loans and adds a risk transfer fee of 15% on the first 20% portion underwater, and 30% on the next 20%. So Geithner (or the banks, whatever you prefer) can swallow that as a reasonable trade for getting this risk off the balance sheet, which includes exposure to repurchase lawsuits or the like. And it’s broadly beneficial for homeowners and investors, and is designed to significantly reduce risk to the taxpayer.

Afterward, Merkley asked if Treasury would help in setting up pilot programs:

GEITHNER: Well, I’d like to — I think the policy is very good. It’s very well designed. We’d like to work with you on it. And the questions is whether we can find legal authority and resources to — to test on a pilot basis.

So Geithner does hold up the possibility of working out legal authority, which is usually used to throw up a roadblock on something Treasury just doesn’t want to do. But this operates from a position where it’s in line with a Presidential priority on refinancing, so Treasury may have incentive to find the legal authority rather than find the reason they can’t do something. Geithner isn’t all that interested in doing things that help people over banks, but if this reaches a sweet spot where people could get help along the way with everyone else, well… you go to war with the financial policymaking overlords you have.

There are ways to help homeowners that also happens to help banks (in this case, even with the modest haircut) and puts people first. Merkley’s plan is one of those ways. So I’m cautiously optimistic.

But keep in mind that nothing in that plan will help stop the immediate foreclosure crisis and the 5 million-plus borrowers who are now delinquent. Much, much more must be done for those folks, and we still have no plan available.

Housing Wire has a bit more.