How Congress Plans To Bring More Under The TARP Umbrella

Here is a bit of tea leaf reading via Housing Wire. The site reported Friday on some details from Barney Frank on the outline of his bill to amend the TARP. Here’s an overview.

The six sections of the outline include a modification of the TARP and its oversight, foreclosure relief, clarification of the automobile manufacturers’ bailout, clarification of additional TARP uses, Hope for Homeowners (H4H) improvements and a home buyer stimulus. “It further requires that Treasury act promptly to permit the smaller community financial institutions that have been shut out so far to participate on the same terms as the large institutions that have already received funds,” the outline reads, in part.

Drilling down a bit, these are the things that caught my eye.

Naturally, mortgage modification gets the usual push. A minimum of $50 billion of future TARP money is to be directed towards mods. It’s a grab bag but does include establishing a program to pay down second mortgages which have been an impediment to modifications, increasing the loan to value ratio from 90% to 93% for borrowers with debt-to-income ratios over 31% and the Treasury’s sharing in the eventual proceeds from sale or refinance is to be eliminated.

As you can see, the program-a failure to date-is slowly having any pretense of rational mortgage underwriting stripped away. More risk is being assumed by the government and any recovery revenue foregone by eliminating the equity participation feature. 

Frank’s outline also calls for the Treasury to “stimulate demand for home purchases and clear inventory of properties” by purchasing mortgages and mortgage backed securities in order to make loans more affordable. It is unclear if the current actions of the Fed in purchasing MBS satisfies this requirement or if, indeed, this is to be in addition to the Fed’s actions. Are we trying to blow up the balloon again?

The outline also calls on the Treasury to clarify the use of TARP funds for the automobile sector and other sectors of the economy. Among the other asset classes mentioned for clarification process are student and auto loans, commercial real estate loans and municipal securities. It’s unclear to me what clarification means but I am going to guess that it means make a case for using TARP money to intervene in these sectors of the economy and we (Congress) will put our stamp of approval on it.

So you can see the direction that the TARP funds are likely to go. Some of it is justifying the extra-legal actions the Bush administration has already taken while other parts are bringing in those that had lined up for a piece of the action. The commercial real estate guys and local government look likely to be cut in on the gravy.

All of this is going to be coming so fast and furiously over the next couple of weeks that the prospect of any meaningful debate and review is minimal. Expect the fine print and last minute amendments to this bill and others to provide some remarkable surprises as well. I don’t think this is going to be one of the Republic’s finer moments.

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