TARP Quarterly Report to
Congress Released
Some interesting criticism of the TARP (Troubled Asset Relief Program) leveled by the top independed inspector TARP Cop in it’s quarterly update to Congress. You can follow these quarterly reports by going to this Page.
From the Executive Summary of the Latest Report:
Well into its second year of operations, the Troubled Asset Relief Program (“TARP”) remains a vitally important part of the Federal Government’s response to the economic crisis, and the formal extension of TARP by the Secretary of the U.S. Department of the Treasury (“Treasury”) on December 9, 2009, makes it clear that this role will continue well into 2010. The focus of TARP has begun to shift, however, as the early TARP programs that invested huge sums in banks are now closed to further investments and most of the largest bank recipients have repaid their TARP funds. Treasury has stated that, going forward, TARP will focus on foreclosure mitigation efforts, small-business lending, and a continuation of support for the asset-backed securities (“ABS”) markets.
Actual Lending is still Decreasing:
Many of TARP’s stated goals, however, have simply not been met. Despite the fact that the explicit goal of the Capital Purchase Program (“CPP”) was to increase financing to U.S. businesses and consumers, lending continues to decrease month after month, and the TARP program designed specifically to address small-business lending — announced in March 2009 — has still not been implemented by Treasury. Notwithstanding the fact that preserving homeownership and promoting jobs were explicit purposes of the Emergency Economic Stabilization Act of 2008 “EESA”), the statute that created TARP, nearly 16 months later, home foreclosures remain at record levels, the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages, and unemployment is the highest it has been in a generation.
Institutions “Too Big to Fail” have become bigger:
To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.
Sounds like if they have to be bailed out again… it’s going to cost a lot more. And allowing them to fail… is going to hurt a whole lot more.
Rewarding Reckless Risks:
To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.
Big Banks Report Fourth Quarter Losses due to Credit Problems
Transfer of Risk:
To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.
The 224 page Congressional Oversight report is quite extensive but it gives a good look behind the scenes of what is really going on and the complexities involved of trying to correct a major bubble.
A recent article by The Motley Fuel gives a nice summary of the current relationship between the Government and your new home loan — especially in explaining why big banks are not lending their own money on Residential Lending. Home Loans that you would think are slam dunk common sense no brainers such as putting 50% down on a home that has decreased in value 50% from the peak … are still subject to government guidelines.
Government insuring 90% of current Residential Mortgages
The market share of current mortgage issuance is even more lopsided. Fannie and Freddie combined currently make up about 70% of new mortgage issuance, with the FHA taking up close to 20%, for a total of around 90% reliance on these three government-backed vehicles.
If private banks were the only issuers of mortgage funding, the cost (interest rate) would blow up in a big way. To compensate, housing prices would get nuked. For example, a 30-year fixed mortgage at 5% with a $1,500 monthly payment will finance around $275,000 worth of house. The same $1,500 mortgage at 9% will only finance about $185,000.
(By the way… that’s why you should laugh at sales campaigns that state you need to buy now before interest rates go up.)
The Motley Fool article also gives a real simple and easy to understand explanation of why those “Greedy Big Banks” are not lending their own money.
Why such reliance? The best explanation is that large banks — like Citigroup (NYSE: C), Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), and Wells Fargo (NYSE: WFC) — don’t have the appetite to lend directly to homeowners after being sufficiently wrecked by housing over the past three years. Also, with the yield curve the way it is, it makes sense for banks with a long-term outlook (I’d like to believe they exist) to invest in short-term Treasury securities instead of longer-term assets like mortgages. Wells Fargo recently admitted it’s doing just that.
President Obama in his recent State of the Union Address stated that the worst of the crisis was behind us… but you really have to wonder if the problems were just transferred to a bigger credit card. Kind of like playing the Credit Card trap of transferring all of the balances from small cards to one big new shiny one. Feels good for a little while… but if basic financial fundamentals are flawed (such as spending more then you make), the inevitable is still going to happen.
Despite all of the efforts and Billions of dollars already spent trying to “save” the “market”, Defaults on the National Level are Not going down… In fact.. Defaults on Government Insured Mortgages are going up according to this latest report from Fannie Mae that you can read here.
In a recent article concerning Las Vegas Real Estate being undervalued by 41% by some leading forecasting companies, there is something in that report that really makes me wonder. I’ve been meaning to follow up with this concerning median home prices of the areas considered “OverValued” in that report and comparing these markets to housing markets such as Las Vegas that have already been decimated in value from the peak of the bubble.
When you start comparing some of these markets that were not allowed to naturally correct before all of the Government subsidies kicked in.. you really have to wonder how long it’s going to take for homeowners in these areas to realize how much cheaper it is to own a home in cities such as Las Vegas… and for those that can… make the move.
(Actually.. I already see it happening with the amount of requests coming in for Las Vegas Real Estate from people who state they are going to eventually make the move.)
Essentially, creating less demand in those areas and prices falling — continuing the cycle of a natural market correction that is inevitable when the economic factor (Jobs, Incomes, etc..) is considered.
Bailouts can’t be relied on forever.. and as the Top Tarp Cop states in the Executive Summary:
Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.
That certainly does not sound like it’s going to get any easier to get a home loan anytime soon to me..
Paul Francis, CRS
Prudential Americana Group – Realtors®
Las Vegas Real Estate
702.592.3058
Part 1 of a five-month McClatchy Newspapers investigation is certainly the must read Real Estate related article of the day/week.
I get this question a lot with one of my new listings in 
