BLOG VIEW: Halftime’s Over: What To Do With The Next $350 Billion

When President-elect Obama is sworn into the nation's highest office Tuesday, will he have the $350 billion remainder of TARP waiting for him, as he's requested? We may get that answer as early as today, as the Senate is preparing to vote on the matter. But regardless of when the funds are available, the consensus is that the money will be released – sooner or later.

So instead of dwelling on the possible drama of Obama issuing his first presidential veto, let's take a look at how the money might be spent. Right now, the most substantial proposal is one put forth last week by House Financial Services Committee Chairman Barney Frank. The legislation – called the TARP Reform and Accountability Act – has the support of House Speaker Nancy Pelosi, and it touches on the two issues that appear to top Obama's TARP objectives: improve oversight and provide foreclosure relief.

Of course, in an ideal world, these components would've been included when the first half of TARP was released. Unfortunately, this isn't golf, and there aren't mulligans. But in keeping with sports metaphors, there is at least one (very large, very expensive) rebound opportunity, and Congress and the new administration would be wise to work the glass like Dennis Rodman.

It almost seems unnecessary to discuss what Frank's proposing on the accountability front. (Then again, is it not unreasonable that this discussion is occurring only after $350 billion has been already spent – err – invested?) His suggestions – more reporting and agreement on how the funds are spent – seem all too obvious in hindsight. And there most certainly should be safeguards in place to ensure that what happened with the first tranche of TARP – a bad-asset play fake and Detroit curveball – is not repeated.

But what about those families struggling with the realities of foreclosure? In a taped interview that aired Sunday on ABC, Obama said "we haven't done enough" to combat foreclosure.

Frank's TARP Foreclosure Mitigation plan, which would have a price tag between $40 billion and $100 billion, is a hodgepodge of solutions that includes no fewer than four "required elements": a systematic loan mod program guaranteed by the government, lowered costs of Hope for Homeowner loans, a loan program to pay down those pesky second mortgages, and purchase of whole loans for the purpose of modifying or refinancing. (That part sounds familiar.)

The act's safe harbor piece – which would protect participating servicers from investor lawsuits – is not inconsequential, and it appropriately keeps a focus on the net present value of a mortgage pool.

An alternative worth considering, however, is one put forth by academia. Christopher Mayer, a professor of real estate at Columbia Business School, testified before the House Committee on Tuesday, where he discussed a loan modification proposal that he published with his colleagues Edward Morrison and Tomasz Piskorski.

The idea (found on the school's Web site, is twofold: One, give servicers greater incentive to modify loans, rather than foreclose; and two, enact legislation that would eliminate "explicit limits on modification, including both outright prohibitions and provisions that constrain the range of permissible modifications," from pooling and servicing agreements.

Such a plan, Mayer stated, would avoid the moral hazard risks associated with bankruptcy cramdowns and lack the taxpayer expense of guarantee programs like the ones proposed by Sheila Bair and Frank. As a matter of fact, Mayer estimated that the plan could prevent as many as 1 million foreclosures at a bargain of a price – only $10.7 billion.

What do you think? Has anyone stumbled upon the right recipe yet? Drop me a line at and share your thoughts on who has the best foreclosure prevention proposal.


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