Where is the responsibility?
On October 3, 2008, President Bush signed into law the TARP (Troubled Asset Relief Program) law. Since then, approximately $350 billion has been funded or allocated for its use. The bill was promoted in part to ease credit crunch for consumers and small businesses and is needed to stabilize financial and lending markets.
On November 11, 2008, the Bush Administration unveiled a plan targeting Fannie Mae and Freddie Mac, who between them own or underwrite about 31 million mortgages worth a combined $5 trillion. The federal government took over the companies in September due to mounting losses on their mortgage portfolios. Eligibility for relief had to be Eligibility is determined by several factors: Homeowners must be 90 days or more behind on their mortgage payments, owe at least 90% of the current value of their home, live in the home in which the mortgage was taken and have not declared bankruptcy. Your mortgage payments would be adjusted through lower interest rates or longer payment schedules with the goal of reducing payments below 38% of monthly household income. Interest rates could be reduced for five years and then raised to a predetermined level. Loan terms could be extended to 40 years.
A week later, on November 18, 2008, FDIC Chairman Sheila Bair revealed the details of her plan for the government to help delinquent homeowners. There were two key elements in the proposal. First, housing payments for borrowers delinquent two months or more would be reduced to 31% of gross monthly income. To get there, mortgage rates could be set at a minimum of 3% for five years, before increasing at an annual rate of 1 percentage point until reaching the prevailing market rate. Loan terms could be extended up to 40 years. Second, to encourage servicers and investors to participate, the government would share up to 50% of the losses if a borrower who had been helped defaulted anyway. The risk of recurrence had been an obstacle for lenders to join the systematic modification plans. In addition, the FDIC would pay mortgage servicers $1,000 for each modified loan. The scheme was expected to initially help 2.2 million borrowers obtain new loans; after some borrowers defaulted again, 1.5 million would ultimately keep their homes, the FDIC estimated. The plan would cost about $24.4 billion, which Bair said could come from the $700 billion bailout Congress passed last month that was “imperative to provide incentives to achieve sufficient scale in loan modifications to stop reductions in loans.” home prices and rising foreclosures. .” Initially, the proposal had been viewed unfavorably by the Bush administration and Treasury Secretary Henry Paulson.
On December 2, 2008, the Government Accountability Office issued a report on the status of TARP. In that report, the GAO stated:
“Treasury had a different perspective on what should be done to assess how institutions were using funds received under CPP, opting instead to develop general metrics to assess overall CPP success rather than work with bank regulators to establish a benchmark. systematic means of determining whether the institutions’ uses of CPP funds were consistent with the purposes of the program, as we recommend.In technical comments, the Federal Reserve also raised concerns about whether the Treasury needed to monitor the use of CPP funds by individual institutions As discussed in the draft, we agree that it will be important to develop a range of metrics to assess the overall success of CPPs and welcome continued discussions with Treasury and banking regulators on general metrics to achieve this purpose. However, given the magnitude of the funds provided to this program, these types of metrics alone will not provide the transparency and accountability necessary to ensure that funds are used consistently by participating institutions for the purposes of the law.”
As a former English major, I don’t know what “general metrics” means, but I have a slight suspicion that it doesn’t have much to do with accountability or transparency. As a lawyer, I object to the term as “vague and ambiguous.”
Last week, CNN reported that Merrill Lynch, CitiGroup and others declined to provide information about where the bailout funds were used and for what purposes, providing further evidence that neither the Treasury nor financial institutions want to be held accountable for where. funds are spent.
On December 22, Barney Frank introduced legislation consistent with the FDIC’s plan. Lawmakers have criticized the Treasury Department for not using any of the initial $350 billion to prevent more foreclosures. Federal Reserve Chairman Ben Bernanke has warned that as many as 2.25 million Americans could lose their homes to foreclosure this year. Frank said his legislation would include a version of a plan, backed by FDIC Chairman Sheila Bair, to spend $24 billion to give lenders financial incentives to modify more loans and help more borrowers keep their loans. homes. Bair has estimated that she could prevent 1.5 million foreclosures.
Earlier this month, CNN reported that more than 50% of all borrowers whose loans were modified by voluntary agreements in 2008 were in default again within six months of the modification, without any reduction in payments. Other news reported that members of the construction industry predicted that 50% of their members would be out of business within the next year because their lines of credit had been withdrawn. Stockton and Sacramento were projected as the number 2 and 5 foreclosure regions in the country with a projected price drop of 22-24% within the next year. Somehow, the consumer is not seeing the effects of the bailout.
What all of this means for the bankruptcy landscape in 2008 in the Sacramento region and across the country is that unless there are some significant changes in the oversight, transparency, and accountability of bailout funds, there will be a wave of bankruptcy filings that has never been seen. seen before. In fact, with the proposed changes to the Bankruptcy Code, which provide for a reduction in mortgage debt in Chapter 13, it is likely that the failure of financial institutions to meet the intended purpose of TARP will encourage, if not compel, bankruptcy. presentations, because that’s going to be the best option for individual consumers, but not necessarily for the economy as a whole. Congress must act to not only ensure funds are available to consumers and small businesses, but also to ensure that lenders comply with the guidelines. Otherwise, the bailout only benefits the lending community, by allowing them to hoard the infusion of cash, without passing it on to end users, meaning consumers and small business owners, as was intended. Without transparency and accountability, the only beneficiaries of the bailout are going to be the financial institutions that were largely responsible for the problem in the first place, due to questionable lending practices, lack of oversight and accountability. Does anyone see a pattern here?
