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Farewell, Bailout Nation?

The Troubled Asset Relief Program may be ending, but its controversial legacy lives on.

| Fri Oct. 1, 2010 11:03 AM EDT

A Tale of Two Bailouts

Then there were the auto bailouts, the $80 billion rescue of General Motors, Chrysler, and their financing subsidiaries. If TARP's Capital Purchase Program was characterized by favoritism and kid gloves, as its critics assert, then the restructuring of two of the Big Three was tough love.

In the spring and summer of 2009, both Chrysler and GM filed for bankruptcy. In court, the two automakers went through a grueling, comprehensive restructuring of their companies. They laid off workers, shut down dealers, and trimmed costs wherever possible to slim down from bulky Mack trucks to sleek, more profitable hot rods. In August, GM announced plans to reissue stock to the public, marking a near-complete turnaround; Chrysler, meanwhile, reported a small profit in early 2009, and projected it would be in the black this year. (By contrast, Chrysler had lost $3.8 billion in the second half of 2009.)

The execution of the auto bailouts, led by President Obama's Auto Task Force, hasn't escaped criticism, either. Another bailout watchdog, the Special Inspector General for TARP, blasted the Obama administration's push to close hundreds of auto dealers as part of the restructuring process and for the auto companies' paltry documentation and reasoning behind those cuts. It was unclear, SIGTARP stated, that the pressure to immediately shutter GM and Chrysler dealers "was either necessary for the sake of the companies’ economic survival or prudent for the sake of the nation’s economic recovery." The report went on to say, "Treasury made a series of decisions that may have substantially contributed to the accelerated shuttering of thousands of small businesses and thereby potentially adding tens of thousands of workers to the already lengthy unemployment rolls—all based on a theory and without sufficient consideration of the decisions’ broader economic impact.”

On the whole, however, the restructuring Chrysler and GM looks to have made them into far healthier companies. Of course, the tougher treatment of the auto companies begs yet another question: Why didn't the Treasury or Fed demand the types of wholesale changes to major banks as they did to the auto companies?

Extend and Pretend

Arguably the most unsuccessful part of TARP is its homeowner relief initiatives. The flagship program here in the Home Affordable Modification Program (HAMP), a multi-billion dollar effort to renegotiate the terms of home mortgage loans to keep Americans in their homes. Doing so, the thinking went, would help borrowers beset by job losses or health problems to ask their mortgage servicers to lower the cost of monthly payments. If a homeowner stays current on their payments, nearly everybody—borrowers, investors, mortgage companies, neighbors—wins.

Except, that is, for the mortgage servicing companies, the ones tasked with implementing HAMP. As Diane Thompson of the National Consumer Law Center has noted, the financial incentives are often greater if the servicer plows ahead with foreclosure instead of working out a loan modification with the borrower. "In the face of an entrenched and successful business model, servicers need powerful motivation to perform significant numbers of loan modifications," Thompson has written. "Servicers have clearly not yet received such powerful motivation. What is lacking in the system is not a carrot; what is lacking is a stick."

Yet the Treasury's HAMP program, run by Fannie Mae and Freddie Mac, is all carrots and few sticks. HAMP's architects continue to stand by the idea that enough financial incentives—$1,000 here, $1,000 there—will entice servicers into modifying more loans. They have yet to penalize the mortgage servicers, the borrower's negotiating partner in HAMP, despite rampant cases of wrongdoing, misdirection, and obfuscation.

Take Kristina Page, a bartender in Panama City, Fl. After coasting through HAMP's trial modification period, Page told Mother Jones in December, she received much higher monthly payments when it came to make her modification permanent. She couldn't understand why, so she asked her servicer, Saxon Mortgage Services of Fort Worth, Texas, about the bump. The company told her the increase occurred because "there is a letter in your file stating your sister Samantha will be contributing $1,300 per month toward your household income." One small problem: Page is an only child. Those kinds of mix-ups, say homeowners, attorneys, and consumer advocates, are endemic in HAMP.

Little wonder, then, that HAMP's success so far has been dismal. Servicers have made about 470,000 permanent modifications since March 2009—nothing to scoff at, but hardly on track to meet its goal of modifying the loans of 3 to 4 million homeowners. (It's worth noting that 663,000 trial modifications have been cancelled.) Moreover, Treasury officials have shifted positions on what those goals actually are. When Treasury rolled out HAMP, the goal was to provide 3 to 4 million homeowners permanent relief; since then, Treasury officials have said they meant 3 to 4 million "offers," a revision for which they've been roundly criticized. "Continuing to frame HAMPs success around the number of 'offers' extended is simply not sufficient," the SIGTARP concluded in a March audit (PDF).

In the end, an unofficial motto has been affixed to HAMP: extend and pretend. It's been criticized for not tackling the housing market's fallout and foreclosure crisis head on, but merely kicking the can down the road, hoping the problem fixes itself somehow. Princeton's Alan Blinder described TARP's foreclosure initiatives as "half-hearted." Or as the SIGTARP put it, "Foreclosure filings have increased dramatically while HAMP has been in place, with permanent modifications constituting just a few drops in an ocean of foreclosure filings."

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