Barney Frank Proposes TARP Reform

Posted by Orb Staff on January 12, 2009 No Comments
Categories : Mortgage Servicing

House Financial Services Committee Chairman Barney Frank, D-Mass., has introduced legislation to amend the Troubled Assets Relief Program (TARP). A vocal critic of the Treasury's management of TARP, Frank introduced the seven-part legislation – the TARP Reform (H.R.384) – to strengthen accountability and increase transparency, he says.

Additionally, the proposed legislation requires the Treasury to allocate between $40 billion and $100 billion of TARP funds for foreclosure mitigation initiatives and seeks changes to the Federal Housing Administration's Hope for Homeowners (H4H) program. The legislation further encourages the inclusion of community financial institutions in TARP, as Frank argues the program has, thus far, disabled participation by smaller institutions.

H.R.384, if passed, would impose several reporting and monitoring parameters on institutions that receive TARP funding. The Treasury, the institution and its primary federal regulator would have to agree on use of funds; the institution would have to publish at least a quarterly report on the funds; and the acquisition of healthy institutions from TARP funds would be explicitly prohibited.

The legislation also would expand the Financial Stability Oversight Board to include the Federal Deposit Insurance Corp. (FDIC) chairman and two additional members (who are not currently federal employees and would be appointed by the president and subject to Senate confirmation).

Oversight modifications would also allow the board the authority to overturn policy decisions of the Treasury secretary by a two-thirds vote.

On the foreclosure mitigation end, the TARP Reform would mandate the Treasury to use some combination of the following program alternatives:

  • a guarantee program for qualifying loan modifications under a systematic plan, which may be delegated to the FDIC or other contractor;
  • bringing costs of H4H loans down, either through coverage of fees, purchasing H4H mortgages to ensure affordable rates, or both;
  • a program for loans to pay down second-lien mortgages that are impeding a loan modification subject to any write-down by existing lender that the Treasury may require;
  • payments to servicers in connection with implementation of qualifying loan modifications; and
  • purchase of whole loans for the purpose of modifying or refinancing the loans (with authorization to delegate to FDIC).

Servicers that modify loans would be provided a safe harbor from liability, so long as the servicer acts in a way that maximizes the net present value of pooled mortgages to all investors as a whole and the anticipated recovery of the modification exceeds, on an NPV basis, the anticipated recovery through foreclosure.

The legislation looks to eliminate the 3% up-front premium of the H4H program, reduce H4H's 1.5% annual premium to a range between .55% and .75% (based on risk-based pricing), raise the maximum loan-to-value ratio from 90% to 94% for borrowers above a 31% debt-to-income ratio and eliminate the government profit sharing of appreciation over market value of home at the time of refinancing.

Other components of Frank's legislation include the development of a program, outside of the TARP, to stimulate demand for home purchases; clarification of authority under TARP (e.g., the Treasury's authority to provide support for commercial real estate loans and mortgage-backed securities); and a permanent increase in deposit insurance coverage for banks and credit unions to $250,000 (originally a temporary enactment scheduled to sunset on Dec. 31, 2009).

A draft of the legislation can be found on the House of Representatives' Web site, www.house.gov.

SOURCE: House Committee on Financial Services

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