With a new White House administration taking over this month, Congress has convened once again to attack the nation's economic problems. High on the agenda is urgent attention to the housing sector, and lawmakers promise to use remaining TARP funds to provide foreclosure aid.

Despite the government's investment of TARP money so far, retail credit markets are still rather stagnant, and most Americans are having trouble refinancing into more affordable loans. But congressional leaders have made it clear that they plan to put plenty of pressure regarding emergency foreclosure aid on incoming President Obama. About $350 billion of the original TARP funds-which represents half of the amount first set aside in the controversial $700 billion rescue plan-hasn't been distributed. With hearings underway to review how the Treasury has allocated the money so far, lawmakers have expressed a renewed commitment to spending a greater portion of the remaining $350 billion on direct foreclosure aid.

Foreclosure aid tactics

To do a better job of helping the real estate markets recover, lawmakers want to put TARP funds to work in the form of loan modification and modified refinance programs for homeowners facing the loss of their homes. Congressional leaders have stated that they'll only agree to release the remaining funds if Treasury Secretary Paulson and incoming president Obama give the green light to loan modification programs similar to those already instituted by the FDIC. That kind of foreclosure aid is characterized by aggressive tactics, such as cutting the interest rates on existing loans, forgiving portions of the outstanding mortgage balances, and extending the amortization schedule for borrowers who need to lower their payments in order to remain current on loan obligations.

Loan modification incentives

Incentives are another part of the FDIC approach, and many in Washington support the idea of using TARP funds to pay banks that agree to lower the ratios of income-to-debt on outstanding home loans. Under this type of plan, lenders who are able to successfully cut loan payments, for example, would be given a cash incentive. The FDIC version of this program awards $1,000 to banks that reduce payments to no more than 31 percent of the consumer's monthly income. Lenders also receive valuable guarantees from the FDIC that if the loan modification programs don't work-and homeowners still default even after getting the assistance-the government will assume half of the financial loss. Estimates are that if the government spends approximately $25 billion of available TARP funds on such foreclosure aid initiatives, it will prevent as many as 1.5 million foreclosures.

Treasury Secretary Paulson had resisted such plans, saying that they're expenses borne by the taxpayer, whereas lending money to banks is an investment with potentially lucrative long-term returns. But now he says that he'll leave TARP fund decisions regarding modified refinance and loan modification plans up to the new Congress and president to decide.

Published on March 4, 2008