As banks hoard Troubled Asset Relief Program (TARP) funds provided by the $700 billion bailout plan, the mortgage crisis continues. Advocates for foreclosure loan modification relief are now demanding that TARP money be spent to help homeowners rework troubled mortgages.

Treasury Secretary Henry Paulson is urging Congress to release the remaining funds in the original $700 billion TARP package; but this time, the money will likely come with specific strings attached. Half of the TARP money was spent in less than three months, but critics point out that it went primarily to banks that are now hoarding it, not to homeowners facing foreclosure. Now, with Paulson pleading for another $350 billion, lawmakers plan to force the Bush administration and President-elect Obama to apply more money directly to the mortgage crisis in the form of funds for proactive loan modification.

Mortgage crisis relief

Many lawmakers say that they'll only agree to release the funds in exchange for loan modification programs like those that are already being done at the FDIC. Under that type of approach, a mortgage heading toward foreclosure can be reworked in radical ways that include interest rate cuts, forgiveness of a portion of the outstanding debt, or extending the amortization period to reduce monthly mortgage payments. Fans of the FDIC mortgage crisis loan modification plan say that it could prevent 1.5 million foreclosures in 2009 at a cost of approximately $24 billion.

Other stipulations would require aid for auto companies, more consumer lending by banks to retail customers, and positive changes in the government's Hope for Homeowners mortgage crisis relief program that has so far not been successful. When it was passed by Congress in July of 2008, experts expected that it would save nearly half a million homeowners from foreclosure. Unfortunately, only a few people have even applied for the program because it's mired in red tape and prohibitive restrictions.

Effective loan modification: reduce rates

Under these new TARP mandates, the Treasury would also be prodded to cut rates on some fixed-rate home-loans in order to help stem the tide of foreclosures. The plan calls for Fannie Mae and Freddie Mac to lower the interest charged on 30-year fixed rate mortgages to 4 1/2 percent. The National Association of Realtors has said that such a cut could significantly stimulate home buying and put a floor beneath eroding real estate prices.

Perfectly Frank

House Financial Services Committee Chairman Barney Frank told reporters that legislation is already being drafted that will set out the conditions under which Congress will allow the remaining TARP funds to be spent. The first time the money was authorized, there was little or no Congressional oversight in terms of controlling how the money was used, and that has created a backlash of controversy from angry taxpayers. Agreement on these updated TARP conditions is expected soon, because the release of the $350 billion is urgently needed, and President-elect Obama seems determined to act swiftly to stop the mortgage crisis.

Published on January 22, 2009