Obituary: TARP (Born October 3, 2008; Died October 3, 2010)

Troubled Asset Relief Program – 2 years old, of Washington, D.C., passed away quietly on Sunday, surrounded by friends and supporters (excluding elected officials), as the Treasury’s authority to make new investments under the influential, yet politically reviled $700 billion program officially expired.

Offering its pre-written eulogy on Friday, the Treasury Department sought to highlight TARP’s legacy on the U.S. financial sector during its short, active and tumultuous life.

“Looking back, it’s clear that TARP has played a critical role in stabilizing the financial system during a period of historic crisis and has helped put our country on the path to economic recovery – at a fraction of that initiative’s original projected cost,” stated a Treasury press release on October 1, buoyed by recent Congressional Budget Office (CBO) figures that predict TARP losses to the taxpayer of $66 billion, down from the most recent Treasury estimates of $105 billion.

Born in the thick of the 2008 financial crisis, TARP was created under the Emergency Economic Stabilization Act of 2008 (EESA), an expedited congressional response to heightening fears that an economic collapse was imminent. Garnering significant bipartisan support in both congressional chambers, the EESA passed the Senate on October 1 by a vote of 74-25 (with 34 Republicans supporting) and two days later in the House by a vote of 263-171 (with 91 Republicans supporting) and was then quickly signed into law by President Bush.

Although TARP was originally created to allow government purchases of non-liquid asset-backed securities and other debt instruments from the books of troubled banks and financial institutions, then-Treasury Secretary Henry Paulson chose instead to inject up to $250 billion of capital into 707 financial institutions through the Capital Purchase Program (CPP). In addition, TARP funds were disbursed to aid struggling homeowners (Making Homes Affordable Program), stabilize the consumer and business credit markets (Term Asset-Backed Securities Loan Facilities Program, or TALF), and improve the health of financial institutions holding real estate-related assets (Public-Private Investment Program, or PPIP). Overall, Treasury disbursed just under $400 billion of the $700 billion approved by Congress.

While on political life support on Capitol Hill in late 2009, Treasury Secretary Timothy Geithner extended TARP’s existence through October 3, 2010, but also chose to narrow the program’s focus to three specific areas in 2010: home foreclosure mitigation; small-business lending; and TALF in order to facilitate lending through securitization markets.

Despite Treasury’s newly-expired authority under TARP, the program’s influence will continue beyond the grave, as disbursements can still be made for certain programs where existing contracts and previous commitments remain, including the following: the Making Home Affordable Program, Hardest Hit Fund, Consumer and Business Lending Initiative, PPIP, and the Automotive Industry Financing Program. Treasury disbursement authority has expired for all other TARP programs, including the Capital Purchase Program, Capital Assistance Program, Asset Guarantee Program, and the Targeted Investment Program.

As the topic of government-sponsored bailouts has become a hot-button political issue leading up to the mid-term elections on November 2, provoking widespread voter resentment, Secretary Geithner urged lawmakers to embrace their early support of TARP.

“A lot of people who voted for TARP decided later that they had to distance themselves from that vote by disparaging the program,’’ said Secretary Geithner during a recent speech. “But I think they should be proud of the votes they cast. They were on right side of history.’’

Due to expectedly low congressional turnout, there will be no memorial visiting hours for TARP.

It's Baaaaack!

Ample debate time in Washington can bring the good with the bad. As healthcare reform continues to dominate the congressional agenda leading into the fall, lawmakers have been granted an opportunity to finely tune the legislative details of financial reform—but also a window to resurrect previously rejected ideas from the dead.

This week, House Financial Services Committee (HFSC) Chairman Barney Frank (D-MA) announced his intention to include the so-called “cramdown” legislation into his chamber's broader financial reform package, injecting new life into a divisive proposal that would allow bankruptcy judges to modify mortgages by extending the term, reducing the interest rate, or writing down the principal amount.

During a HFSC subcommittee hearing yesterday to assess the progress of the Making Home Affordable (MHA) Program, Chairman Frank joined a chorus of lawmakers in expressing disappointment that the Obama administration’s loan modification program has not assisted more distressed homeowners. According to Treasury data, MHA has only modified the loans of 12 percent of eligible delinquent borrowers. Figures from some of the large banks are even lower, with Wells Fargo reporting 11 percent of eligible borrowers and Bank of America coming in at 7 percent. Despite the low percentages, the administration is citing statistics that the program has helped reduce the monthly payments of 350,000 homeowners since March.

Facing stark opposition from the financial industry, the cramdown proposal has now been rejected twice by the Senate—most recently last spring when the Senate voted down an amendment offered by Sen. Richard Durbin (D-IL) by a 51-45 vote. The prospects for passage do not yet appear any better the third time around, but Frank's renewed push could change the momentum. While the Obama administration has not explicitly endorsed cramdown, the administration is not opposed either. When pressed by Democratic lawmakers at yesterday’s House hearing, Treasury Assistant Secretary for Financial Institutions Michael Barr and the Department of Housing and Urban Development’s Assistant Secretary for Housing David Stevens stated that retrospective cramdown legislation would not have a negative effect on the MHA program. Influential Senate Republicans on the banking committee do not expect cramdown to make a comeback. If cramdown is rejuvenated in the Senate, it will likely be due to a change of heart by some of the following ten Senate Democrats who voted against it last spring:

Bennet (CO),Byrd (WV), Carper (DE),Dorgan (ND), Johnson (SD), Landrieu (LA), Lincoln (AR), Nelson (NE),Pryor (AR),Specter (PA)

Hope for Second Mortgage Holders

The Treasury Department yesterday released its new improved “Making Home Affordable” (MHA) program that will now offer assistance for second mortgages, such as home equity loans, in addition to assistance with first mortgages. The administration announced the MHA in February and released the details in early March. Tuesday’s announcement addressed the expansion of MHA as well as more support for the Hope for Homeowners program. Treasury estimates that 50 percent of “at risk” mortgages also have second liens. Under the new program, both first and second mortgages would be modified “in tandem.” Interest rates on second loans would be reduced to one percent, unless they are interest-only loans, in which cases the rate would be two percent. The term of the modified second loan would be extended to match the term of the modified first mortgage. After five years, the interest rate on the second would be adjusted to the same rate as the modified first mortgage, and the second mortgage would be re-amortized over the remaining term at the higher rate. The MHA also includes “pay for success” incentives for servicers and borrowers similar to those announced for first mortgage relief.

The MHA will pull the Federal Housing Administration’s (FHA) Hope for Homeowners program under its umbrella so that servicers will be required to evaluate borrowers’ eligibility for the advantages of both programs. Twelve servicers have signed contracts to make modifications under the MHA. Under Hope for Homeowners, mortgage holders “accept a payoff below the current market value of the home, allowing the borrower to refinance into a new FHA-guaranteed loan.” Only 51 Hope for Homeowners programs have closed since October 2008.

The Treasury also addressed the administration’s support for legislation that would allow the FHA to reduce borrower’s fees; increase lender flexibility to refinance troubled loans; and permit borrowers with higher debt burdens to qualify for relief. The legislation, sponsored by Senate Banking Committee Chairman Chris Dodd (D-CT), has raised concerns with bondholders because of the “servicer safe harbor for mortgage loan modifications” section. Under this provision, servicers would be protected from legal liability should pooling and servicing contracts be violated during the course of making certain loan modifications. The House passed the provision last month along with cram-down language, and the Senate is due to take up the bill later this week. We are hearing that although the Senate bill does not include the cramdown language, neither Sen. Dodd nor Sen. Dick Durbin (D-IL) is likely to offer it as an amendment.

Making Home Affordable Program Update (PDF)