One proposal for a better way to have distributed TARP funds

January 20th, 2009 · No Comments

A couple days ago my wife and I were getting annoyed watching some TV news story about the request for the second $350B of TARP authorized funds.  The nerve of asking for more funds given the lack of accountability that has been applied to the first $350B just drives us nuts.  How did any of the money “lent” out actually help things?  No one can currently tell us!


While no one can say for sure what happened to the money, the story linked above makes a very good case that the bulk of those funds have gone toward helping the management, and likely the stockholders, of the banks that received the funds as opposed to helping the customers of those banks.  Yes, a number of banks needed the funds to avoid violation of legal limits on capitalization ratios, or to simply avoid insolvency as customers withdrew funds in fear.  But many of the executives are openly admitting that they’re looking to use the funds to make acquisitions during the down-market which really helps themselves and the stockholders.  What about helping the home-owners and solving the problems with defaulting mortgages?  I know I’ve seen a story on some prime-time news show stating that we haven’t even topped out on the rate of defaults because a whole lot of Alt-A and ARM loans still have yet to reset and bump up home-owner’s mortgage payments.  If I’m remembering correctly, the forecast was for those to peak in late 2009 or early to mid 2010.  This really scares me.  The government has already “shot its wad” so to speak and shouldn’t be planning another $700B stimulus to solve that problem!

So then my wife and I turned constructive and wondered how could that first $350B have been used to better help home-owners?  Which is how they sold the need for it to Congress and us citizens, no?  And how could it have been distributed such that it affected those involved in the mortgage crises, yet still been distributed somewhat fairly?   The best idea we came up with is that the government should have made direct mortgage payments on behalf of homeowners.  The critical part being direct payments — the money doesn’t actually make it into a homeowner’s bank account and thus can’t be hijacked and used for other purposes.  This ensures the whole $350B still gets into the bank’s, or mortgage holder’s, hands where it can be used for recapitalization, or to expand lending, or to make payments on CDOs, or even to make acquisitions.  But along the way, it would help homeowners greatly!  For those close to bankruptcy, this would have given some breathing room to try and resolve their situation.  For those who’ve lost a job, this could give them a lot longer runway before they had to panic about making mortgage payments. And for those who’ve made financially sound decisions and have no problem paying their current mortgage, well, they get rewarded for their smart decisions!  (And they suddenly have thousands of dollars no longer needed for mortgage payments that could be used to make purchases and thus help the whole economy recover.)   In fact, this act would have done a lot to allow all players in the mortgage market to start to wind-down their involvement since the money would have flowed along the natural channels of where mortgage payments went.

So how much are we talking?  Well, according to this 2007 report by the US Census bureau, there are slightly more than 51 million mortgages in the US for owner-occupied homes.  That means the government could have sent in a payment of around $6,800 on everyone’s mortgage using only the first $350B of TARP funds.  For someone with a $100,000 mortgage at 7%, that’s more than 10 months of payments!  (Not including property tax, insurance, and PMI the monthly payment would be $665.30)  For a $300,000 mortgage at 7%, that’s still about 3.5 monthly payments!  Let’s cynically assume the rest of the $700B in TARP funds would have been used by our highly efficient goverment to setup and administer the program so we can avoid bumping that figure up further and making me even more upset about what did happen to the money.  And yes, I’m consciously ignoring non-owner-occuppied mortgages.  I figure investors should have known better and shouldn’t get a “bailout” reward.

By the way, how much of that $350B already distributed do you expect our government to ever get back?  They are saying it was “invested” in the companies that got the funds, but I’m not too confident that we’ll see it come back.   The “good” news is that, in the absolute worst case of never getting a penny back, each and every current US citizen would only need to pay an additional $1,145.66 in taxes to zero it out.  That’s based on the  current population of the US being 305.5M — which is what it actually is according to the US Population clock on the government’s census site for today.  Let’s pray we don’t actually need to belly up to the bar and pay that off!

Tags: Personal Finance

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