Congressional Panel Questions FHFA Economist on Impact of TARP

The Congressional Oversight Panel assessing the impact ofrnthe Troubled Asset Relief Program (TARP) on financial stability is currently holding itsrnlast few hearings before issuing a final report. rnThe panel heard last week from Patrick Lawler, chief economist for thernFederal Housing Finance Agency who was asked to address three specific issues from the perspective of FHFA.</p

The impact of TARP on financial stabilization andrnrecovery in the U.S. economy and financial sector.</p

Lawler told the panel that FHFA worked with the Departmentsrnof the Treasury and Housing and Urban Development (HUD) and others to assistrnborrowers who were struggling to make payments on poorly structured andrnunaffordable loans.  Programs developedrnto some degree with TARP funds included a Streamlined Modification Programrn(SMP) for Fannie Mae and Freddie Mac (GSE) loans and the Home AffordablernMortgage Program (HAMP) for both GSE and non-GSE loans.  Outside of TARP, FHFA developed the HomernAffordable Refinance Program (HARP) to facilitate refinancing of borrowers whornwere upside down in their mortgages and worked again with Treasury on methodsrnof aiding the funding of state housing finance agencies.</p

Lawler said that due to these and other programs, especiallyrnthe Federal Reserve’s purchase of mortgage securities, the cost of mortgagernborrowing declined and cheaper financing and foreclosure prevention programsrnhelped stabilize house prices.  Delinquenciesrncontinued to rise sharply as the recession worsened but have now started tornease.  Inventories of houses for sale andrnthe shadow inventory of homes, either withdrawn from the market by discouragedrnsellers or potential foreclosures, remain high in portions of the country.  “Continuation of the recent pricernstability or resumption of gains in prices cannot be assumed,” hernsaid.  “But lower unemployment ratesrnwould help considerably.  </p

Fannie Mae and Freddie Mac’s responsibilities with respectrnto TARP.</p

Making Home Affordable (MHA) and related programs at FHFArnare funded by TARP.  Comparable programsrnat the GSEs, however, do not use TARP monies to support their lending andrnworkout activities.  None-the-less thernGSE’s active involvement in homeownership preservation is consistent withrnFHFA’s goals for safeguarding GSE assets and restoring public confidence in therntwo.</p

Even though they do not receive TARP funds for modificationsrnand servicer incentives, he said, the GSEs contribute significantly to the HAMPrnloan modification program volume. rnAlthough their mortgages represent 33 percent of delinquent mortgagesrneligible for HAMP they represent 54 percent of trial and permanent modifications.rn</p

In 2010 the GSEs completed 946 thousand workouts (a 120rnpercent increase over 2009). rnApproximately 88 percent of workouts are home retention actionsrnincluding modifications, repayment and forbearance plans.  The remainder are foreclosure alternativesrnsuch as short sales and deeds in lieu which reduce the severity of the GSErnlosses while minimizing the impact of foreclosures on borrowers, communities andrnneighborhoods.  The GSEs foreclosed onrn392 thousand homes during 2010.</p

Lawler said that HAMP did not produce the volume of loanrnmodifications that Treasury initially hoped for but FHFA believes it has been instrumentalrnin standardizing and streamlining the industry’s modification process and inrnthat way has contributed greatly to the sharp rise in non-HAMP modificationsrnthat have taken place over the last two years. rnSimilarly, the volume of HARP refinances was much less than hoped, butrnrefinances outside of HARP, many using the same structure, have been ten timesrnas large.</p

The GSEs have also served as agents for TARP fundedrnprograms.  Fannie Mae acts as Treasury’srnMHA program administrator and oversees the implementation and execution of newrnand existing MHA programs.  Its rolernincludes designing and implementing standards programs, serving as recordrnkeeper and pipeline manager and coordinating with the paying agent for therndisbursement of Treasury and Enterprise funded incentives.  Fannie Mae also provides guidance tornborrowers and servicers, develops and maintains websites, systems and programrntools, trains servicers and sponsors outreach in hard hit cities.  Freddie Mac acts as Treasury’s compliancernagent, conducting examinations and reviews of servicers’ compliance with MHArnpublished program rules,</p

FHFA’s interaction with Treasury with respect to the GSErnand the federal government’s initiatives to promote financial stability.</p

Lawler said that in both the Bush and Obama AdministrationsrnFHFA has worked closely with Treasury on critical issues brought on by thernhousing crisis.  He presented somernhighlights of that interaction.</p<ul class="unIndentedList"<liWorked together to address the deterioratingrnfinancial condition of the GSEs, addressing both financial support and arnframework for the conservatorship.</li<liThe Emergency Economic Stabilization Act of 2008rn(EESA) formed the statutory basis for Treasury and FHFA to work together on anrnarray of foreclosure avoidance activities as outlined above.</li<liThe FHFA Director is a member of the FinancialrnStability Oversight Board.</li<liThe Dodd-Frank Act created numerous requirementsrnfor FHFA-Treasury interaction on an array of activities and rulemakingsrndesigned to promote financial stability.</li

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