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January 16th, 2009

How the Second Half of TARP Could be Different

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In what the Wall Street Journal describes as “an early test of Democratic loyalty to the president-elect,” lawmakers voted in favor of releasing the second-half of the TARP funds to the upcoming administration. While the vote was expected, but not guaranteed, how can taxpayers expect that this $350 billion will be spent more efficiently and effectively than the first? The short answer is we can’t; but the new administration has promised to do some things differently.

Click here to view the latest list of participants in the bank-share purchase program.

The Obama administration said taxpayers can expect a $50-$100 billion foreclosure-assistance program to be a major focus. So much so that according to the Journal, it has been the only detailed point of spending to be released so far:

Options include forcing down interest rates, persuading lenders to cut borrowers’ principal and using mortgage giants Fannie Mae and Freddie Mac, which are now controlled by the government, to jump-start the housing market.

For which audience will they be “forcing down interest rates” for? The Journal article reports the foreclosure plan may not be aimed at borrowers who are under water, only those whom, because of the recession, are “struggling to pay their loans.”

Also, consider this: substitute the word “investor” in stead of “lender” (used in the quoted text above). If you own a bond fund, chances are you own some form of mortgage-backed securities in some degree — YOU are among the people being asked to take perhaps a sizable loss on your investment. Will you agree with that? Using “lender” is incorrect in this regard. A lender lends money — but probably doesn’t actually hold or own the loan.

Moving away from foreclosures now: In an attempt to eliminate the funds from expanding into private industries, Mr. Obama’s economic team has said no financial assistance will be provided to Detroit via TARP funds, unless it’s under “the context of a comprehensive restructuring.”

Certain strategies utilized by the present administration, like the purchases of equity in financial institutions, are expected to be repeated under the next.

If you are a regular follower of this blog, you know full well of our opinions regarding how government interaction distorts the normal functionality of the marketplace. While the government interaction and influence certainly won’t stop, at least there are a few new strategies aimed at improving the TARP’s success. It’s unnerving to imagine that when this funding has run its course, the possibility could exist that a $700 billion program did little to positively change anything.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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