The focus of the Treasury Department’s $700 billion Troubled Asset Relief Program (TARP) could soon shift from recapitalizing banks to helping troubled homeowners avoid foreclosure and stimulating demand for housing.
The Bush administration has agreed to make a formal determination that the second $350 billion in TARP money will be needed, so that President-elect Barack Obama could theoretically have the money at his disposal soon after he takes office Jan. 20.
Obama called Bush today, after the president said during a press conference he would make the determination if requested by the incoming administration. The determination triggers a 15-day waiting period during which Congress could vote to deny the Treasury the authority to borrow additional money to fund TARP programs to the full $700 billion limit approved in October.
Although Congress is expected to approve the request, it may also put additional conditions on how the money can be spent. Many lawmakers were angry that the first round of TARP money was used to recapitalize banks through preferred stock purchases, with no guarantees banks would boost lending (see story).
The Obama administration — which is also working on a separate stimulus plan focused on job creation — is expected to broaden the TARP program. But it may have to work with Congress on new conditions lawmakers are seeking to impose on how the money can be spent.
On Jan. 9, Massachusetts Democrat Rep. Barney Frank — who chairs the House Financial Services Committee — said he wants to see at least $40 billion and as much as $100 billion of the next round of TARP funding used for foreclosure prevention.
Frank has introduced a bill, HR 384, that would require the Treasury to use a combination of steps to prevent foreclosures, which could include a loan guarantee program that would backstop lenders who agree to modify loans, a program to pay down second mortgages that impede loan modifications, and purchases of whole loans with the goal of modifying them or refinancing them.
In a statement today, Frank said lawmakers "should not allow our disappointment at the Bush administration’s poor handling of the TARP program to prevent the Obama administration from using the funds in more appropriate ways," and that he hoped the House would pass HR 384 this week.
"It seems clear the Obama administration agrees with what we are setting forward, and I believe this creates a framework so that the release of these funds can go forward," Frank said.
HR 384 would also require the Treasury to develop a program outside of TARP to stimulate demand for home purchases and clear excess inventory of homes for sale. That goal would be accomplished by keeping mortgage rates affordable through the purchase of mortgages and mortgage-backed securities using funding under the Housing and Economic Recovery Act of 2008, passed in July, Frank said.
The National Association of Realtors and other industry groups are asking the government to take similar measures to foster demand for housing, such as subsidizing mortgage rates and restoring the temporary $729,750 loan limits in high-cost areas for FHA, Fannie Mae and Freddie Mac (see story).
Obama’s top economic adviser, Larry Summers, promised today in a letter to congressional leaders to launch a "sweeping effort to address the foreclosure crisis," including reducing mortgage payments for "economically stressed but responsible homeowners." Summers also said the incoming administration intends to reform bankruptcy laws and strengthen the FHA’s Hope for Homeowners refinance program.
The reference to reforming bankruptcy laws was an allusion to a proposal to allow bankruptcy judges to "cram down" the balance of some troubled borrowers’ mortgages to make their payments more affordable. The mortgage lending industry is opposed to bankruptcy cramdowns, saying the practice will make secondary market investors who fund mortgage loans skittish and subsequently raise mortgage rates.
Sen. Dick Durbin, D-Ill., last week announced an agreement with Citigroup on legislation that would limit cramdowns to existing mortgages and require homeowners to certify that they attempted to obtain a loan modification from their lender before filing for bankruptcy.
The Mortgage Bankers Association said it remains opposed to the bill because of the "destabilizing effect" it would have on "an already turbulent mortgage market." Any change to the bankruptcy code needs to protect FHA and VA guarantee programs, the MBA said.
The Bush administration has opposed such legislation, with a Department of Housing and Urban Development official telling lawmakers Friday that it would add uncertainty for investors and the mortgage markets, leading to higher interest rates for borrowers.
Cramdowns also have implications for FHA and Ginnie Mae, which securitizes FHA loans, said Phillip Murray, deputy assistant secretary for single-family housing programs, in testimony before Frank’s committee.
FHA and Ginnie Mae don’t have the legal authority to reimburse lenders for any loan principle forgiven through the bankruptcy process, but which must still be paid to investors in their securities. Cramdown legislation could prove to be "a powerful disincentive to doing business" with FHA and Ginnie Mae, Murray said.
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