The Trouble with TARP II

Harry Moroz

The Trouble with TARP II

Last week, the Senate voted to release the second $350 billion of TARP funds authorized by the Emergency Economic Stabilization Act. As discussion of what to do with this $350 billion heats up, TheMiddleClass.org cautions us to think hard about what the Senate vote means for homeowners and for corporate and government accountability after a dismally administered go at spending the first $350 billion in TARP funds.

$350 billion have been distributed to the nation’s largest financial institutions so far. Yet, struggling middle-class homeowners have enjoyed no apparent benefit from an expenditure of taxpayer dollars sold to them with a promise to pursue foreclosure mitigation efforts…In the next five years, 8.1 million homes of all mortgage types will be lost to foreclosure. The Treasury Department, Congress, nor financial institutions have been held accountable for the lack of action on this housing crisis.

Nearly eight in ten seriously delinquent homeowners are not on track for any loss mitigation, a figure that has worsened over time. One in five loan modifications made in the past year is currently delinquent. Thus, not only are government efforts to prevent initial foreclosures falling short, but loan modification programs are failing to keep homeowners in their homes in the long term.

As The Washington Post pointed out over the weekend, the foreclosure crisis rages on and is consuming more and more middle-class households:

[T]he foreclosure crisis knows no class or income boundaries. Many borrowers ensnared in the evolving mortgage mess do not fit neatly into the stereotypes that surfaced by early 2007 when delinquency rates shot up.

But exactly zero dollars of TARP I were designated for foreclosure prevention efforts, while banks have been left free to spend taxpayer money as they see fit (that is, on everything except making new loans). The Senate vote provided an opportunity to ensure generously funded action on the foreclosure crisis and to improve accountability for corporations receiving bailout funds.

President Obama has promised, through a letter sent to Congress by the Director of the National Economic Council Lawrence Summers, that he will increase foreclosure prevention efforts, provide a “clear and transparent” explanation for TARP investments, encourage programs that increase lending, and place additional conditions on firms receiving TARP support such as limits on executive compensation and dividends. These are all desirable objectives. Indeed, they are so desirable that they should be codified in legislation that holds the financial institutions receiving TARP funds, Congress, and the President accountable for their achievement. Accountability, in this case, means more than mere disclosure of data: for example, if financial institutions use TARP money to make acquisitions that do not benefit taxpayers, Treasury should be authorized to revoke the loan and contemplate further punitive measures. Indeed, delayed authorization of the second tranche could have provided an opportunity for Congress to link longer-term corporate governance reform with the taxpayer bailout.

A moratorium on foreclosures, mortgage write downs, and alteration of bankruptcy law to permit modification of mortgages on primary residences, along with stricter regulation of executive compensation and stricter disclosure of how TARP funds are used, would likely have made TARP II worth supporting. As TheMiddleClass.org concludes, if these measures has been included, “the second TARP would have set the stage for a necessary rethinking of who the financial system works for in the United States.”