CBO released their fourth statutory report on TARP, and the headline that will come out of it will surely be their estimate that the program will cost the government $25 billion dollars. I’ve been over and over why this is an almost meaningless figure, so I won’t rehash it here. But I will say that this number is so low for TARP itself for one particular reason pointed out by Shahien Nasiripour: the government will only spend less than one-quarter of what they allocated, according to the CBO estimate, on HAMP, their foreclosure mitigation program. This is from the CBO report:
The federal government initially committed a total of $75 billion for the Home Affordable Modification Program (HAMP), which was intended to provide direct payments to mortgage servicers to help homeowners avoid foreclosure. Of that total, $50 billion was made available through the TARP, and the remaining $25 billion was to be provided through Fannie Mae and Freddie Mac. Through the end of October, roughly half a million homeowners had received permanent modifications to their mortgages through the HAMP. The Treasury has committed roughly $8 billion of the HAMP funding provided through the TARP for grants to selected state housing finance agencies and another $8 billion for programs of the Federal Housing Administration. Total disbursements to mortgage programs were only about $710 million through the end of October, but
CBO anticipates that the TARP will ultimately disburse a total of $12 billion to those programs. Because payments provided through such programs are direct grants and require no repayments, the government’s cost is equal to the full amount of the disbursements (that is, the program has a 100 percent subsidy).
(We never hear much anymore about that $25 billion dollar outlay from Fannie and Freddie, do we?)
There’s so much to talk about here. First off, if you subtract it out, roughly $38 billion in TARP savings is coming from under-delivery on HAMP. That’s 152% of the estimated total cost of the entire program. So if HAMP fulfilled its goals, TARP would have cost 152% more. In other words, a big element of the persistent theme of TARP “saving taxpayers money” comes from the government reneging on its promise to help struggling homeowners.
Second, the report makes clear that $8 billion of the $12 billion that will ultimately be spent comes from unrelated mortgage-relief programs outside of HAMP itself. In reality, HAMP will get a $4 billion dollar commitment when all is said and done, just 8% of the total allocated. The Hardest Hit Fund (grants to states with the biggest housing problems) and the FHA Short Refinance program (incentive payments for underwater borrowers), two programs created on the fly, will end up spending twice as much money as the Administration’s signature foreclosure mitigation program.
Third, this is a far more realistic assessment of HAMP than OMB’s insistence that $46 billion of the $50 billion will be spent. Unlike that projection, CBO looks at the actual numbers of homeowners participating in the program. This has fallen off considerably in recent months. Given that only 483,000 homeowners are currently in active, permanent modifications, and that fewer and fewer get their trial mods converted with each passing month, CBO’s numbers are simply more realistic. For OMB to be correct, some flood of permanent modifications would have to enter the system over the next year, and servicers don’t really want to modify any loans. So that’s not happening.
Fourth, let’s stipulate that HAMP was insufficient to deal with the enormity of the foreclosure mess even if it had worked perfectly. Federal Reserve Governor Elizabeth Duke testified before Congress a couple weeks ago that she expects 6.5 million more foreclosure filings between now and 2012, and if you add in 2009 you’d have over 8 million foreclosures while HAMP was active; other analysts put the number as high as 11 million. So its goal of 3-4 million modifications was under half of total foreclosure filings. And in reality, it didn’t cover more than 6%.
Fifth, as John Taylor of the National Community Reinvestment Coalition told CNBC yesterday, this unending stream of foreclosures serves as a lead weight on the economy. If you are going to cut back on any expenditure, the one that would curtail the supply on the market, stabilize neighborhoods, provide a floor for housing prices and start to allow homeowners to build equity again would not be the one.
Foreclosures are the mortal enemy to economic recovery. We can keep on pumping money into the system to create liquidity for banks and in the market, but it’s simply not going to succeed until they plug the hole at the bottom of the well!
So what has the Administration done to stem foreclosures? They have put in place a voluntary program, which has done roughly half a million permanent modifications since the program began, but there’s been three and a half million foreclosures during the same time period and seven million foreclosure filings.
That kind of performance merits a failing grade by anyone’s standards.
Even without dipping into the unused TARP funds, the government has a tremendous amount of authority to dictate modifications. Through Fannie and Freddie they own a substantial chunk of the housing market, and they certainly facilitate all of it through various liquidity measures. They could simply mandate a substantial amount of refinances through their position as the lead investor.
But while the huge failure of HAMP can be seen clearly in the numbers, I think the time to rely on a voluntary incentive program at the discretion of the banks is over. The government could put that unused $38 billion to use by funding foreclosure mediation programs all over the country. The best of these are really working in places like Philadelphia because they put borrower and lender face-to-face with one another to force a solution. They could also fund legal services for foreclosure victims, so that every homeowner has due process to fight dishonest banks who are practically dissolving the court system in this country with their lawless practices.
There are even more wide-ranging solutions than that, like the government buying up hundreds of thousands of mortgages at a discount and operating a modern-day Home Owners Loan Corporation. The biggest threat comes from inaction, which this CBO report shows is effectively what we have with the status quo. Every homeowner in America will suffer from falling housing prices due to mass foreclosures. Unemployment will increase as the housing sector fails to rally. There will be no economic recovery without a rebound in the largest market in America, the residential housing market.
And yet the Administration is acting like providing 8% of the promised allocation for their tent-pole foreclosure mitigation program is good enough.