WHERE’S THE ACCOUNTABILITY?
On October 3rd, 2008, TARP (Troubled Asset Relief Program) was signed into law by President Bush. Since then approximately 350 Billion has been funded or allocated for use.. The bill was touted part to ease credit restrictions for consumers and small businesses and necessary to stabilize the financial and lending markets.
On November 11, 2008, the Bush Administration unveiled a plan which centered on Fannie Mae and Freddie Mac, which between them own or back about 31 million mortgages worth a combined $5 trillion. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages. Eligibility for relief was to be Eligibility is determined by several factors: Homeowners must be 90 days or more late in their mortgage payments, owe at least 90% of their home’s current value, live in the home on which the mortgage was taken and have not filed for bankruptcy. Their mortgage payments would be adjusted through lower interest rates or longer repayment schedules with the goal of bringing payments below 38% of monthly household income. Interest rates could be lowered for five years and then raised to a predetermined level. Loan terms could be lengthened to 40 years.
A week later, on November 18, 2008, FDIC Chairwoman Sheila Bair unveiled details of her plan to have the government help delinquent homeowners. There were two key elements to the proposal. First, housing payments for delinquent borrowers two months or more late would be reduced to 31% of gross monthly income. To get there, mortgage rates could be set as low as 3% for five years, before increasing at an annual rate of 1 percentage point until they hit the prevailing market rate. Loan terms could be extended as long as 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 ended up in default anyway. The risk of re-default had been one obstacle to getting lenders on board with systematic modification plans. In addition, the FDIC would pay servicers who process mortgages $1,000 for each re-worked loan. The plan was expected to initially help 2.2 million borrowers get new loans; after some borrowers re-default, 1.5 million would ultimately keep their homes, the FDIC estimated. The plan would cost an estimated $24.4 billion, which Bair has said could come from the $700 billion bailout Congress approved last month and which was “imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures.” The proposal had been initially looked on unfavorably by the Bush Administration and Treasury Secretary Henry Paulson.
On December 2nd, 2008, the Government Accountability Office issued a report regarding the status of the T.A.R.P. In that report, the GAO stated:
“Treasury had a different perspective on what should be done to evaluate how institutions were using funds received under CPP, opting for development of “general metrics” for evaluating the overall success of CPP rather than working with bank regulators to establish a systematic means for determining whether financial institutions’ uses of CPP funds were consistent with the purposes of the program, as we recommended. In technical comments, the Federal Reserve also expressed concern about whether Treasury needed to monitor individual institutions’ use of CPP funds. As discussed in the draft, we agree that it will be important to develop a range of metrics to evaluate the overall success of CPP and we welcome continued discussions with Treasury and the bank regulators on general metrics to achieve this purpose. However, given the magnitude of funds provided to this program, these types of metrics alone will not provide the necessary transparency and accountability needed to ensure that participating institutions are using the funds in a manner that is consistent with the purposes of the act.”
As a former English Major, I don’t know what “general metrics,” means, but I have a sneaking suspicion that it doesn’t have a lot 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 where the bailout funds were used and for what purposes, providing further evidence that neither the Treasury or the Financial Institutions want to accountable for where the funds are spent.
On December 22, Barney Frank introduced legislation consistent with the FDIC plan. Lawmakers have criticized Treasury for not using any of the initial $350 billion to prevent additional home foreclosures. Federal Reserve chairman Ben Bernanke has warned that up to 2.25 million Americans could lose their homes to foreclosure this year. Frank said his legislation would include a version of a plan, supported by FDIC Chairman Sheila Bair, to spend $24 billion to give lenders financial incentives to modify more loans and help more borrowers keep their homes. Bair has estimated it could prevent 1.5 million foreclosures.
Earlier this month, CNN reported that over 50% of all loan borrowers who had their loans modified by voluntary agreements in 2008 were in default once again withing six months after modification, without any reduction in payments. Another news item reported that members of the building industry were predicting that 50% of its members were going to be out of business within the next year because they have had their lines of credit yanked. Stockton and Sacramento were projected as the No. 2 and 5 foreclosure regions in the Country with a projected price drop from 22-24% within the next year. Somehow the consumer isn’t seeing the trickle down effects of the bailout.
What this all means for the Bankruptcy outlook in 2008 in the Sacramento region and entire country is that unless there are some significant changes in oversight, transparency and accountability for the bailout funds, there is going to be a wave of bankruptcy filings that has never been seen before. In fact, with the proposed changes in the Bankruptcy Code, providing for a cram down of mortgage debt in Chapter 13, it is likely that the failure of the financial institutions to fulfill the intended purpose of the T.A.R.P. will encourage, if not compel, even more bankruptcy filings, because that’s going to be the best option for individual consumers, but not necessarily the economy as a whole. Congress needs to act to not only sure that funds are made available to consumers and small businesses, but also that the lenders comply with the guidelines. Otherwise, the bailout only benefits the lending community, by allowing them to hoard the cash infusion, without passing it along to the end users, i.e. the consumers and small business owners, as 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 loan practices, lack of oversight and accountability. Does anyone see a pattern here?
Paul R. Bartleson, www.sactobankruptcy.com; www.sacramentobankruptcyblog.com
