Obama Could Stick Homeowners Under The TARP

According to a recent post on Forbes.com By Daniel Indiviglio, Obama wants to Use The TARP to absorb some of the individual homeowners losses.

With few other options, the White House may adapt an FDIC plan to help stall foreclosures. The Obama administration is considering spending up to $100 billion of the Treasury Department's $700 billion Troubled Asset Relief Program to ease the crisis. Under the FDIC's plan, banks would modify mortgage loans, while Uncle Sam would use TARP dollars to absorb some of these losses.
And it's got promise because a version of it is already being used with some success to handle troubled mortgages originated by IndyMac. The IndyMac program allows the bank to lower borrowers' monthly mortgage payments. In return, the government pays a portion of the bank's expenses and takes on up to 50% of any losses should the mortgage default.
Why not just reduce the principal balance on a mortgage loan? Many balances can't be altered because the mortgages themselves have been securitized.

The Federal Housing Administration's HOPE for Homeowners program, which took effect last October, for instance, was intended to help more than 400,000 struggling homeowners. The bank saved close to $50,000 per loan by changing the terms rather than foreclosing. The FDIC estimates it could do the same for 2.2 million other mortgages if it's able to tap TARP funding and bring the modification program to the general public. Estimated cost: $24 billion to $25 billion--far less than the $40 billion to $100 billion members of Congress and the Obama administration are considering to keep people in their homes.

The program allows interest rates to be drastically reduced temporarily before increasing to a fixed market rate. One suggestion, which may or may not involve TARP money, would allow bankruptcy judges to rewrite mortgage terms. The Mortgage Bankers Association argues that this so-called "cram-down" approach would make it more difficult for consumers to buy a home by leading to higher interest rates and tighter lending standards.

Obama has supported allowing bankruptcy judges to modify mortgage terms, and cram-down legislation is currently being considered in Congress. But this option leaves many open questions: Would the banks or the government absorb the loss? Would there be an automated process to rewrite the mortgages, or would it be done on a case-by-case basis? Would the new mortgage amount be based on market value or the borrower's ability to pay?

The Treasury Department has had discussions with the FDIC about using TARP money to expand its IndyMac program, and the administration is considering this option. The central bank approved a foreclosure prevention plan Tuesday. It has many similarities to the FDIC plan, but it would only be used to modify mortgages held by Federal Reserve banks.

These are historical times we are living in and a lot of these proposals make humanly sense. But on the other hand we should ask ourselves: what about the basics of Capitalism? Is this the start of America’s journey towards Socialism?

By Christian Bohyn A/K/A MonkeySold.com