Congress has concluded a lame duck session this week that was focused heavily on the current status of implementation of the Troubled Assets Relief Program (TARP) and the potential emergency relief for the automobile industry. The political battle lines remained relatively unchanged throughout the session, with Democrats and Republicans unable to agree on the scope of any relief, and political gridlock in the Senate stalling efforts to reach agreement on any legislative relief package. In addition, more than a half dozen hearings on various aspects of the TARP program unfolded on Capitol Hill this week, with the Senate Banking Committee, House Financial Services Committee, and other oversight bodies exploring a range of issues related to the implementation of the Emergency Economic Stabilization Act (EESA). Among the key aspects of the program subjected to intense Congressional scrutiny this week were the following:
- Treasury's decision to refrain from acquiring mortgage-related assets under the TARP program;
- The current status of the efforts by the Federal Reserve to increase liquidity;
- The most appropriate mechanism for providing relief to the domestic auto industry;
- The current status of oversight efforts by the Government Accountability Office;
- The nomination of Neil Barofsky (current Assistant U.S. Attorney for NY) to serve as Treasury Inspector General for the TARP program; and
- Strategies for mitigating home foreclosures.
This week's hearings follows a significant change in policy announced by Treasury Secretary Paulson last week for the TARP program. Among the key program changes announced by Treasury last week were the following:
- The initial purpose of TARP, namely the acquisition of mortgage assets from financial institutions in order to restore liquidity, has largely been shelved as ineffective.
- In its place, Treasury is focusing on restoring lending liquidity and market stability through the Capital Purchase Program, and expects to expand this liquidity initiative through capital injections into a wide range of consumer lending entities -- including those that may not be regulated at the federal level. Treasury is expected to focus on "viable" financial institutions and lenders in its future relief efforts, and is considering the implementation of a private capital "match" requirement for entities taking Treasury funds.
- Treasury is exploring foreclosure mitigation efforts, but has no plans to deploy the recently proposed FDIC plan for mortgage restructuring; and
- Treasury will attempt to retain the remaining unobligated $410 billion in TARP funds as a reserve without announcing new programs.
House Speaker Nancy Pelosi and Senate Majority Leader have announced their intention to return to Washington on December 8 to continue working to provide relief for the automotive industry, and have asked auto manufacturers to present a long-term sustainability plan to lawmakers in advance of the December session.
FDIC Advances Significant Proposal for Foreclosure Mitigation
Late yesterday, FDIC Chair Sheila Bair announced a national expansion of the mortgage restructuring plan developed by the FDIC and deployed to resolve troubled mortgage assets held by IndyMac bank. Titled "Mod in a Box," the FDIC release offers a step-by-step roadmap for financial institutions, servicers, lenders and investors to restructuring mortgages in the same way that FDIC approached the issues with IndyMac. Following on the contentious Tuesday hearing, continued market declines, and Congressional pressure to address foreclosure issues, this approach by FDIC may alter the approach of TARP in the coming days. The FDIC program functions as follows:
- FDIC conducts a viability determination to assess whether there is a recovery process available for the specific borrower, including conducting an NPV analysis of the property, due diligence on the borrower's income and assets, and related factors;
- Restructure the mortgage to reach a maximum of 38% of the borrower's household income, including interest rates as low as 3 percent, forebearance of principal, and extended amortization over 40 years if needed;
- Structure a mortgage rate that increases over time to meet the Freddie Mac weekly survey rate cap;
- Using marketing and bulk restructurings/mailings with pre-populated forms to make the restructuring process more rapid;
- Offering investors up to a 50% guarantee of repayment in the event of redefault.
Sonnenschein has developed a summary of all major Federal interventions in the financial markets both prior to enactment of the EESA and recent TARP capital injections. This document is available at http://www.sonnenschein.com/docs/TARP_112008.pdf. As Congress continues oversight of the EESA and develops further modifications to the TARP, we will provide further financial markets updates.