Penalties for TARP Recipients Who Fail to Modify Loans: No Happy End

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Includes: BAC, C, JPM, MS
by: J Clinton Hill

With recent BLS unemployment figures ranging from U3 at 10.2% to U6 at 17.5% (aka alternative measures of labor underutilization), it is no wonder that foreclosures have been climbing at an alarming rate in the face of America’s "statistical" economic recovery. Stimulus funds are either spent or pending deployment, so there is probably little outside of employer based tax incentives (perish the thought!) or "legitimate" economic recovery (reminds me of waiting for Godot) upon which the Obama Administration can depend for job growth.

Meanwhile, many individual household balance sheets continue to bleed red while the Fed Reserve has done plenty to help shore up the balance sheets of banks and other "too big to fail" institutions that represent a systemic risk to our financial system. Is saving the little guy (i.e. individual taxpayer and/or currently unemployed) just "too small to matter" in calculating the systemic risks to our nation’s financial system, community social fabric, and family infrastructure?

If you are a corporate socialist rat bastard who accepted taxpayer money and/or transferred the risks of illiquid assets to taxpayers just to save your own ass when the fit hit the shan, engaged in the redeployment of literally free government loans to support your gambling habit and high bonuses, and now find yourself hypocritically espousing the virtues of free-market capitalism to argue against such loan modifications, then the answer is probably yes.

The bottom line is that positive cash flow determines who survives and being gainfully employed (vs. passive income) is the primary source for most Americans. Therefore, it should come as no surprise that the Obama Administration intends to target TARP recipients who have been either reluctant or inefficient when it comes to extending loan modifications for eligible borrowers. Below is an excerpt from Bloomberg’s coverage of this story:

The U.S. Treasury Department will begin taking action against lenders that aren’t doing enough to ease mortgage payments for troubled homeowners as part of the Obama administration’s campaign to curb foreclosures.

Lenders face “consequences” that may include sanctions and monetary penalties if they fail to perform under the Home Affordable Modification Program, the Treasury said. The $75 billion program requires banks that took federal aid to help homeowners at “imminent risk” of default by lengthening repayment terms, lowering interest rates and making other changes to the mortgages to avert foreclosure.

It is not like the president has much choice. Have you reviewed Gallup’s most recent job approval stats on him lately? 51% approve and 41% disapprove. Given the economic outlook in another Gallup Poll survey, this should not surprise anyone. Only 37% see things getting better while 57% believe they will get worse.

Let us return to the banks. Their lack of participation is understandable. Modifying loan terms to reduce mortgage payments would require a reduction in principal balances due or extending the repayment period. Either choice negatively impacts earnings going forward. The first would translate into more write-downs for banks while the latter would unfairly disadvantage individual borrowers (whose tax dollars, incidentally, have been used to bail out their mortgage creditors who still wish to collect full boat on residential real estate assets worth at least 40% to 50% less).

Oh well, if this Friday’s employment situation report is worse than expected, I would anticipate more urgency being directed towards the implementation of penalties for non-compliant lenders who fail or refuse to modify loans and ultimately the bottom line for their borrowers/benefactors. Bank of America (NYSE:BAC) is reputed to be worst among TARP recipients and holds almost 25% of the 4 million loans set for modification. Morgan Stanley (NYSE:MS), Citigroup (NYSE:C), and JP Morgan Chase (NYSE:JPM) are noted as the best of the program’s participants.

There is no neat way to end this story which is just one big mess in and of itself. Therefore, I have no further comments.

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