Congressional Panel Questions FHFA Economist on Impact of TARP

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

The impact of TARP on financial stabilization and recovery in the U.S. economy and financial sector.

Lawler told the panel that FHFA worked with the Departments of the Treasury and Housing and Urban Development (HUD) and others to assist borrowers who were struggling to make payments on poorly structured and unaffordable loans.  Programs developed to some degree with TARP funds included a Streamlined Modification Program (SMP) for Fannie Mae and Freddie Mac (GSE) loans and the Home Affordable Mortgage Program (HAMP) for both GSE and non-GSE loans.  Outside of TARP, FHFA developed the Home Affordable Refinance Program (HARP) to facilitate refinancing of borrowers who were upside down in their mortgages and worked again with Treasury on methods of aiding the funding of state housing finance agencies.

Lawler said that due to these and other programs, especially the Federal Reserve's purchase of mortgage securities, the cost of mortgage borrowing declined and cheaper financing and foreclosure prevention programs helped stabilize house prices.  Delinquencies continued to rise sharply as the recession worsened but have now started to ease.  Inventories of houses for sale and the shadow inventory of homes, either withdrawn from the market by discouraged sellers or potential foreclosures, remain high in portions of the country.  "Continuation of the recent price stability or resumption of gains in prices cannot be assumed," he said.  "But lower unemployment rates would help considerably.  

Fannie Mae and Freddie Mac's responsibilities with respect to TARP.

Making Home Affordable (MHA) and related programs at FHFA are funded by TARP.  Comparable programs at the GSEs, however, do not use TARP monies to support their lending and workout activities.  None-the-less the GSE's active involvement in homeownership preservation is consistent with FHFA's goals for safeguarding GSE assets and restoring public confidence in the two.

Even though they do not receive TARP funds for modifications and servicer incentives, he said, the GSEs contribute significantly to the HAMP loan modification program volume.  Although their mortgages represent 33 percent of delinquent mortgages eligible for HAMP they represent 54 percent of trial and permanent modifications.

In 2010 the GSEs completed 946 thousand workouts (a 120 percent increase over 2009).  Approximately 88 percent of workouts are home retention actions including modifications, repayment and forbearance plans.  The remainder are foreclosure alternatives such as short sales and deeds in lieu which reduce the severity of the GSE losses while minimizing the impact of foreclosures on borrowers, communities and neighborhoods.  The GSEs foreclosed on 392 thousand homes during 2010.

Lawler said that HAMP did not produce the volume of loan modifications that Treasury initially hoped for but FHFA believes it has been instrumental in standardizing and streamlining the industry's modification process and in that way has contributed greatly to the sharp rise in non-HAMP modifications that have taken place over the last two years.  Similarly, the volume of HARP refinances was much less than hoped, but refinances outside of HARP, many using the same structure, have been ten times as large.

The GSEs have also served as agents for TARP funded programs.  Fannie Mae acts as Treasury's MHA program administrator and oversees the implementation and execution of new and existing MHA programs.  Its role includes designing and implementing standards programs, serving as record keeper and pipeline manager and coordinating with the paying agent for the disbursement of Treasury and Enterprise funded incentives.  Fannie Mae also provides guidance to borrowers and servicers, develops and maintains websites, systems and program tools, trains servicers and sponsors outreach in hard hit cities.  Freddie Mac acts as Treasury's compliance agent, conducting examinations and reviews of servicers' compliance with MHA published program rules,

FHFA's interaction with Treasury with respect to the GSE and the federal government's initiatives to promote financial stability.

Lawler said that in both the Bush and Obama Administrations FHFA has worked closely with Treasury on critical issues brought on by the housing crisis.  He presented some highlights of that interaction.

• Worked together to address the deteriorating financial condition of the GSEs, addressing both financial support and a framework for the conservatorship.
• The Emergency Economic Stabilization Act of 2008 (EESA) formed the statutory basis for Treasury and FHFA to work together on an array of foreclosure avoidance activities as outlined above.
• The FHFA Director is a member of the Financial Stability Oversight Board.
• The Dodd-Frank Act created numerous requirements for FHFA-Treasury interaction on an array of activities and rulemakings designed to promote financial stability.