TARP II: Money for Banks, Not Homeowners

[Joanne98]

TARP II, the second helping of $350 billion that is supposed to restore the health of our financial system, will soon be dished out by the Obama administration. Ostensibly, much of this money will go to help homeowners stay in their homes. But, as is the case with many Washington policies, this money is also going to end up in the bankers' pockets.

The basic deal is simple. More than ten million homeowners are underwater, owing more than the market value of their home. Millions of these homeowners have fallen behind on their mortgages and now face foreclosure.

But, under TARP II, the Treasury rushes to the rescue, buying up the current mortgage at far more than the market value. It then issues a new mortgage that reflects the market value of the home, which allows the homeowner to stay in their home.

Depending on the price decline of the house, the Treasury can easily be handing $30,000, $40,000, even $50,000 to the banks so that a homeowner can stay in a home in which he/she has little or no equity. This is a great deal for the banks, but it is not very helpful to homeowners, and just about the worst use of money that the Washington policy wonks ever produced.

This is not to attack the idea of helping homeowners. Millions of people listened to the politicians, the policy wonks and even nonprofits, who told them that buying a home in a bubble-inflated market was a good way to build wealth. Almost all the wizards who gave this advice still have their high-paying jobs, but the people who took the advice are underwater in their mortgages and facing foreclosure.

People should perhaps know better than to listen to the "experts," but unfortunately, most do not. It is fair to try to give a hand to those who got taken. There are simple, no-cost ways to do this, as I have pointed out in the past.

The most obvious way to help these homeowners is to temporarily change the foreclosure process so that people would have the right to stay in their homes as renters for a substantial period of time, paying the market rent. This requires no taxpayer dollars, no new bureaucracy and it can take effect the day Congress passes it. In addition to giving former homeowners security in their home, it also gives bankers a real incentive to negotiate terms to allow homeowners to stay in their house as homeowners, since banks do not want to become landlords.

Continued>>>
http://www.truthout.org/011909A

[madrchsod]

1. it`s all about the shareholders of the banks

listening to the experts yesterday it was all about bailing out the bank stockholders. their opinions were that the government should not hold the banks accountable but to let them have the money free and clear. they joked about the house and senate banking committee's leadership and opening mocked the idea of nationalization.

in their opinion the banks should receive the next 350 free and clear of oversight because the bankers not the government know what is best for their business.

which begs the question....if they are so good at managing their banks why did they need the money in the first place?

[eomer]

2. Who ended up getting a windfall of real money in most cases?

I don't think it was the banks (or their stockholders).

Take a case where Person A bought a house early in the buildup of the bubble, paying $250,000. Person A then sold that house for $400,000 to Person B just before the bubble burst. The bank remitted $400,000 of real cash, which all went to Person A (it was a zero-down deal, to keep the math simple). Then the bubble burst and the market value of the house crashed from $400,000 back down to $250,000.

Is it the bank who made off with the windfall in this case and therefore should be forced to disgorge it? No, it is Person A who ended up with a windfall of $150,000 of real cash. Where did the windfall cash come from? If Person B defaults on the mortgage then the windfall cash came from the bank (and its stockholders) and was transferred to Person A. If, on the other hand, Person B continues to pay the mortgage for its full life, then the windfall cash came from Person B and was transferred to Person A. If we were to split the difference and make the bank forgive some portion of the principal balance of the mortgage (in other words, some portion of the $150,000 that was bubble-icious) then the windfall cash that Person A ends up with will have come partly from the bank stockholders and partly from Person B.

Unless we are going to force Person A to disgorge that $150,000 of windfall profits (that Person A already spent on vacations, expensive cars, home theater systems, and so on) then we are left deciding how to divide up the loss of real wealth between the bank stockholders and Person B.

So it was not necessarily the banks who made out like bandits and should be forced to pay up. In many cases it was an individual who was savvy or lucky enough to time the market -- that's who ended up with the real money.

[eomer]

3. Let's take another case.

In another example, Person A bought a house before the buildup of the bubble, say for $250,000. Late in the bubble cycle Person A refinanced to pull the bubble-equity out of the house, taking out a new mortgage of $400,000. Close to $250,000 of the $400,000 was used to pay off the original mortgage and Person A ended up with about $150,000 of real cash. Then the bubble burst and the market value of the house crashed from the bubble level of $400,000 back down to $250,000.

Did the bank end up with windfall cash in this scenario? No, Person A ended up converting $150,000 of funny money (bubble money) into real cash and spent it on vacations, expensive cars, and home theater systems. So if Person A defaults on the mortgage then $150,000 of windfall cash was transferred from the bank stockholders to Person A. If, on the other hand, Person A continues to pay the mortgage for its full life then there is no transfer of windfall cash since the money that Person A borrowed to buy goodies will have eventually been paid back by Person A to the bank and its stockholders.

Are there cases where the bank and its stockholders are the recipients of windfall cash? I haven't thought of any; maybe someone can help me out and describe one or more.

By the way, this and my previous post are considering situations involving just a simple mortgage investment. I'd really like to know whether some of the bailout money is being used to bailout speculative investments in credit default swaps and similar things. If so, that's a totally different story.

_{Edit: typos}

[eomer]

4. Okay, here is an example where money ends up in bankers' pockets.

But let's be clear that the "bankers' pockets" that we're talking about in this example are in the pants of the bank executives, not the bank stockholders.

After all, the bank and its shareholders doled out real cash every time a mortgage was originated and, by contract, the most they will ever get back is a repayment of that real cash plus interest. So they are not in a position to turn bubble money into windfall cash.

But the bank executives are a different story. While the bank was in the business of making a bunch of risky mortgages and the bubble was expanding, the bottom line of the bank looked great and the bank executives took home billions of dollars in bonuses. When the bubble burst, it turned out that those bank profits had been illusory, bubble-money profits and therefore the huge bonuses were not really earned -- they were windfall. But there doesn't seem to be any talk of going after the huge sums of money that were transferred out of the system into the personal wealth of the bank executives. The media has trickily put the focus on whether future compensation should be limited. That's not much of a hardship for an executive who already took home a couple hundred million dollars that was not really justified!

So my list of those who have managed to convert bubble-money into real cash (which means that someone else had their real cash transferred over to those who received it) now includes bank executives in addition to home sellers who timed the market (from my previous example).

So far I still haven't come up with any scenarios where banks or bank stockholders ended up with windfall cash. Somebody help me out.

[CoffeeCat]

5. This is so outrageous...

We all ready gave banks money, which was supposed to be used to unfreeze the credit markets. Banks
were supposed to start lending.

Bottom line---the banks didn't do with the money what they said they would.

So, we're going to hand them another dump truck full of money, and we're going to--this time--trust
them to give this money to homeowners to pay down their mortgages.

Who in the hell believes any of this? It's ridiculous!

They're promising us enticing ideas--because bailouts are unpopular and they need to try a bit harder
when they swindle us a second time.

They will not deliver on these promises. Banks will hold onto the money, or they'll use the money to buy
up more banks, in an attempt to enrich themselves and turn themselves into bigger banks.

Are these are the same banks that--two weeks ago--refused to divulge how they were spending the first bailout
money? Many reporters tried to track down how they used the bailout $. Not one reporter was successful at
determining how ANY bank spent these hundreds of billions of dollars.

So...just how dumb are we to hand over additional billions?