Today President-elect Obama asked the Bush administration to request the remaining $350B of TARP funds, so they may be used ASAP after January 20. These funds will be used in addition to the $800B stimulus plan proposed by the new administration. The Bush administration has agreed.
The Troubled Asset Relief Program was initially supposed to help "solve" the housing crisis...but the funds "somehow" wound up bailing out major Wall Street players and insurance companies, and recapitalizing banks. Foreclosures continue to rise, housing values continue to fall, and with unemployment currently at 7.2%, the recession more than a year old, there's no bottom to the housing market in sight. And the entities that have received the monies can't give a clear accounting of where it all has gone.
A Possible TARP Focus? Foreclosure Mitigation
TARP needs an overhaul. On Friday, House Financial Services Committee chairman Barney Frank, D-Mass., released the outline of a bill to amend the TARP.
Distribution of the remaining $350B TARP will be contingent upon increasing transparency and overseeing Treasury actions. Distribution will also be “conditioned on the use of a minimum of $50 billion for foreclosure mitigation.” Treasury Secretary Comrade Henry Paulson is tasked to develop a comprehensive plan by March 15, 2009. The elements of the plan include:
- a guarantee program for qualifying loan modifications
- lowering costs of Hope for Homeowner loans
- a program for loans to pay down second lien mortgages that are impeding a loan modification
- grant servicer incentives and assistance to stimulate modifications, and include the purchase of whole loans for the purpose of modifying or refinancing them
TARP has come under increasing criticism, and Frank is taking steps to make the use of funds more transparent--and effective.
The Recession has begun its second year and job losses are expected to rise through 2009. Resetting subprime mortgages have hit their peak of defaults and foreclosures, but Alt-A foreclosures are still rising...and homeowners without jobs will swell the ranks of foreclosures as well. The Chair of the Sentate Banking Committee, Chris Dodd, D.-Ct., notes that there are 9,000 foreclosures per day. So what's a bank to do?
"Cramdowns." Accept them, that is. A "cramdown" is the changing the parameters of a mortgage, through reducing principal or interest, during a bankruptcy, which would be in lieu of a foreclosure. A bank could lose less by allowing a modified loan than by going through the foreclosure process.
Current federal bankruptcy law prohibits a judge from modifiying the terms of a primary residence mortgage, either in terms of principal owed or interest rate. However, modifications may be made on other kinds of debt, both secured and unsecured, including that for credit cards and autos. And, interestingly, second homes.
Citigroup has now agreed to drop its opposition to cramdowns. And where the largest financial services company in the world goes, others are thought to follow. Financial industry lobbyists are vowing to continue to fight this. And it should be noted that Citi has (thus far) received $300B in bailout monies...and is currently trying to sell parts of itself. The WaPo has an editorial about cramdowns; one of the greatest minds in financial blogging explains the benefits.
Help for Homebuilders
The National Association of Homebuilders brought 80 homebuilders to DC to meet with their legislators on Jan. 7 to push for a $150 Billion stimulus package. The builders hope to persuade Congress to include in the stimulus package subsidies that would bring mortgage rates below 3% for the first half of 2009. The builders also hope to pass $22,000 in tax credits for homebuyers.
However, many analysts believe this is just a "fix," not a solution for the housing crisis. These analysts believe s the best thing for the economy is to prevent as many foreclosures as possible by giving lenders more incentive to modify loans at lower rates. Those who are opposed to the NAHB believe that spending taxpayer dollars to try to boost home sales and prop up prices will not help the economy in the long run.
As we've mentioned recently, local home builders in trouble include Church Hill Homes faced mass foreclosures and massive liens; Weather Hill Homes recently faced mass foreclosures; and, most recently, parcels from one of K Hovnanian's Four Seasons Active Adult Communities, this one in Charlottesville (actually Ruckersville), is facing mass foreclosure.
The Foreclosure Mitigation and Cramdown push are likely to have allies in congress as they will help individual owners already in trouble; but the NAHB request, while it may save some jobs, is akin to bailing out the auto industry, and will enounter opposition.