August 27th, 2011
Econintersect: When the TARP (Troubled Asset Relief Program) was passed and signed into law in the fall of 2008, $45.6 billion was designated to aid homeowners. Any money in the TARP which was not used was specified to pay down the national debt. According to ProPublica, only about $2 billion has actually been spent to date. Additional money has been committed but has not actually yet gone out the door. ProPublica quotes a Treasury spokesperson who said the government is on track to eventually spend a total of $7.2 billion on committed programs.
Follow up:There is some disagreement about exactly how much of the homeowner aid money is being or has been spent. This week The New York Times reported that $22.9 billion had been spent or pledged to help homeowners with mortgages. This is more than $15 billion more than the ProPublica number. The NYT article said that 1.7 million homeowners have been helped with government supported loan modifications. The Times did not indicate how many of those mortgage rescues actually “stuck”, i.e. did not still go on to default after the modifications. Nearly a year ago it was reported that 11% of federally sponsored mortgage mods went on to later default anyway (newsytype.com).
The biggest problem with doing mortgage mods is the millions of homeowners (more than 11 million according to the Huffington Post earlier this year or 14 million on March 31 according to Deutsche Bank in a Bloomberg article) who are underwater on their loans – i.e. owe more than the house is worth. It's interesting that Deutsche Bank projects things will get even worse with 25 million mortgages eventually going underwater. To refinance one of the following three things must happen:
- The homeowner must bring cash to the refinance closing and roll into a lower mortgage balance;
- The lender must agree to a write down of the principal in the refinanced mortgage; or
- A third party (government) pay the missing capital.
With mortgage modification programs reaching only a small fraction of the more than 11 million (or 25 million) homeowners not eligible to refinance the full principal of the current mortgage, one wonders why the TARP mortgage relief funds cannot be used as intended. There is certainly a need as shown in the following graph from the NYT:
Editor’s note: Not only do millions face having to pay more principal than their house is worth, they are stuck with interest payments much higher than the 3.5% to 4.25% available this week. Couldn’t the housing market be stabilized sooner and at much less ultimate cost if a larger number of these 11 million were kept in their homes making payments on a reduced obligation?