Battle Over TARP Now Centers On Housing

With the Bush administration unlikely to seek the second half of the $700 billion Wall Street bailout fund before it leaves office, many experts think that money will now go toward foreclosure relief—and possibly an economic stimulus plan—under the Obama administration.

Treasury Secretary Henry Paulson and Congressional Democrats at odds over using the so-called TARP fund for home-foreclosure relief, so there’s virtually no chance a new round of funding will be approved before a new Congress is sworn in on Jan. 6—unless there's a major shock to the financial system or economy.

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“The signals are there for the {Bush} administration to ask for the extra money,” says Will Straw, associate director for economic growth at the Center For American progress, a Democratic think tank with links to the Clinton administration. “There's an opportunity to use a large chunk of money to help address foreclosures. If the administration wanted to take that approach, then an agreement is probably within reach. The administration appears not to be.”

Congress had become increasingly frustrated with the TARP’s focus and execution, particularly after a hasty, and somewhat, desperate approval process.

“In some respects the mechanics of TARP were invented after the fact,” says former Democratic Senate Banking Committee Chairman Donald W. Riegle Jr. “Congress is uneasy about what has been done thus far and what may be done with second half of the funds and whether we’re getting observable results that we can feel good about.”

Democratic members of the House Financial Services Committee recently blasted Interim Assistant Secretary of the Treasury for Financial Stability Neel Kashkari over the program’s failure to help homeowners, following similarly critical reports by two oversight entities under the direction of Congress

“You don’t have a comprehensive plan to deal with foreclosures,” lamented Rep. Maxine Waters (D-Calif.), echoing widespread anger and disappointment over the Treasury’s execution. “Please don’t come here and ask for another penny,” she told Kashkari.

His boss, Paulson, who has vacillated on the matter, is apparently now resigned to that. When asked about his plans, Paulson told CNBC Tuesday: "We've got what we need right now.”

Paulson didn’t address the issue of foreclosures but he did say it was important for banks to be lend more than they currently are, especially in the wake of the Treasury’s capital injection program.

“They can't be hoarding capital,” he said. "The question is are they lending enough. The answer from everyone is no."

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Nor are they doing much mortgage modification, another sore point for some in Congress. Some would like the Treasury’s capital injection program to make that a general condition of participation. Thus far, only Citigroup has been required to do so, but that didn’t happen until the bank received additional government aid following its initial TARP funds.

“If there’s a [housing] strategy being applied, it certainly isn’t visible to the naked eye,” says Riegle.

Legislation Introduced

Waters, (D-Calif.) recently introduced legislation calling for $24.5 billion in foreclosure modification and prevention to be funded under the TARP, based on a plan developed by FDIC Chairman Shelia Bair.

"The congresswoman believes that was one of the major intentions in giving Treasury the authorization and flexibility,” says her press officer, Michael Levin.

The goal is to modify half of the 4.4 million non-GSE loans expected to become problems in 2009. Based on a 33-percent re-default rate, 1.5 million homeowners would be spared foreclosure.

“The system wasn’t created to handle this many troubled loans and foreclosures, so the question is how to do fix the system” says the FDIC’s David Barr.

Under the plan, the government would pay companies that service the mortgages $1,000 for each modification and share up to 50 percent of any loss if a modified loan re-defaults.

Though many Democratic legislators have spoken highly of the Bair plan, the fate of Waters’ legislation in the waning days of the current Congress is unclear, but a vote is thought to be unlikely.

“There would be little sense doing that now without the new administration’s endorsement,” says Will Straw, associate director for economic growth at the Center For American progress, a Democratic think tank that is home to a number of high-level Clinton Administration officials.

Another uncertain factor is funding.

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By Kashkari’s count, the Treasury has committed $335 billion of the $350 billion in TARP money currently available. Only about half of that has been distributed to the 87 financial institutions that have had applications approved, but the rest is at least spoken for.

Some speculate that all this means that aside from housing relief, a good portion of the second $350 billion will not be spent and the money essentially put toward the massive fiscal stimulus package being spearheaded by President-elect Barack Obama.

When asked Thursday if he would urge Treasury to seek the additional funding, Obama said his economic team had been "in conversations" with the Treasury, but had not seen any information on "what kinds of risk might be coming up between now and the time I take office."

"At the point they give us some signal this is necessary, then we would evaluate it," added Obama, who said the nation can't afford a collapse of the financial system.

Pressure To Act

The latest push for foreclosure relief comes as the economic slump deepens, marked by rising unemployment, which has been a key driver in the past. Recent data show the problem has moved well beyond the less traditional sectors of the mortgage market, such as subprime and no documentation loans, or housing speculators burnt by the real estate market bust and that one out of two loans modified and re-defaulted.

The average loan size of the 4.4 million loans expected to go 60 days past due is $200,000. Interestingly enough the median price of an existing, single-family home was $183,300 in October, versus $206,700 a year ago.

“Congress is going to take a lot of heat from its constituents,” says former ten-term Republican congressman Bill Frenzel. “The public is going to get very sick of foreclosures and joblessness.”

Congress’ oversight committee on TARP, COP, has been revving up its operations, and its chairwoman, Elizabeth Warren, raising her profile in the debate.

Warren, a Harvard Law School professor and consumer advocate of sorts, echoed the Democratic litmus test on new funding, telling CNBC, “My recommendation would be to ask Treasury to try to answer our questions first and make a more informed judgment,” she told CNBC Monday.

Support for foreclosure relief is broad among trade groups and other interest parties, as is using TARP as a funding source, but unanimity on the details has been elusive thus far. .

“We support something helping at-risk homeowners,” says Scott Talbott, chief lobbyist for the Financial Services Roundtable. “And restoring the housing market itself makes sense.”

The Mortgage Bankers Association has been working with Bair and Waters on the issue for a year, says its VP and lobbyist Francis Creighton.

“It’s something we're able to work with, but we’re not there yet,” says Creighton, referring to differences over the mechanics. “Right now, I don't think we're going to endorse that specific language.”

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“It’s something we're able to work with, but we’re not there yet,” says Creighton, referring to differences over the mechanics. “Right now, I don't think we're going to endorse that specific language.”

The FDIC has been negotiating with the Treasury over the issue, but that’s yet to result in anything tangible. Some say Paulson is aware that the industry is working on proposals and is waiting for those to emerge.

At this point, however, Paulson appears to favor measures to lower mortgage rates, which would theoretically help the housing market by stimulating demand. Kashkari last week confirmed that the Treasury is “seriously looking” at a plan to offer 30-year fixed rate mortgages at 4.5 percent, while some of the mechanics of such a plan have been leaked to the news media this week.

Such idea has been relatively positively received but even supporters acknowledge it could backfire by pulling more people into the housing quagmire because foreclosures are a natural drag on prices, even if sales show signs of life.

People in the trenches of the housing mess aren’t pulling any punches.

“You can only stabilize prices by stemming the foreclosure rate,” says Melissa Cohn, CEO of the Manhattan Mortgage Company in New York City.