by Dan Krell © 2009.
Last week more bailout legislation was introduced in Congress. The legislation is not a new proposal, but rather it embraces previous bailouts and stimulus packages to refine and focus a plan of attack on all economic fronts (including the real estate and auto industries). H.R. 384, also known as the TARP Reform and Accountability Act of 2009, was introduced in congress by Rep. Barney Frank (D-MA) on January 9th.
Although the legislation is titled the TARP Reform and Accountability Act of 2009, it is not only meant to refine the original TARP (Troubled Assets Relief Program). However, by looking at the content, you will see an orchestrated effort to solve problems not anticipated by previous acts as well as widening efforts to stabilize the economy. You can view the entire legislation on the internet (http://www.govtrack.us/congress/billtext.xpd?bill=h111-384).
The legislation is broken down into seven sections: modifications to TARP and oversight; foreclosure relief; auto industry financing; clarification of authority; improvements to HOPE for Homeowners program; homebuyer stimulus; and FDIC provisions.
Title I describes the proposed refinements and limits to the original TARP funds as well as provide conditions for additional funding. This includes compliance and accountability; limits on executive bonuses as well as corporate divesture of private jets; provide TARP funds to smaller community institutions; and increase size and authority of oversight.
Title II describes foreclosure relief including relief programs through TARP funds and loan modifications programs. Loan modification programs are to be administered with standardized systems as well as requirements for borrowers and property types.
Title VI describes a home buyer stimulus program with special mortgage interest rates. The program is proposing to “stimulate demand for home purchases and reduce unsold inventories of residential properties” by making available “affordable interest rates on mortgages.” Although the program is for home purchases, it may also be available to refinancing as well. However, there is a caveat describing the possible targeting of such a program to areas hardest hit by the foreclosure crisis.
Notwithstanding the attempted efforts by our Government to shorten the ongoing effects of the financial and foreclosure crises, a recent study indicates that we may have no choice but to endure the aftermath. A paper by Carmen M. Reinhart (University of Maryland) and Kenneth S. Rogoff (Harvard University), titled The Aftermath of Financial Crises, analyzes previous global financial crises and compares the resultant recessions. Additionally, the length and severity of recessions were compared to non-crises recessions.
Reinhart and Rogoff describe average historical post financial crises effects as reducing home prices by as much as 35% over six years, increasing unemployment rates by as much as 7% over four years, and rapidly expanding government debt (not attributed to bailouts, but rather to a declining tax base). Their conclusion is that recessionary effects have already eroded equity values equivalent to historical recessions even though today’s governments have more monetary flexibility and have acted differently than their predecessors.
Although it appears that we may have to endure the effects of the recent financial crisis, there are expectations for government bailouts to soften the blow. However Reinhart and Rogoff warn that we should not “push too far the conceit that we are smarter than our predecessors.”
This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 12, 2009. Copyright © 2009 Dan Krell.