Brains Not Included

Cracked Up, Whacked Out and Completely Out of Control

When the Roof Leaks Put a TARP On It

The night was stormy.  The wind was trashing and thunder was crashing and trees were falling all around us.  It was a horrible storm.  The rain was coming down in sheets and water flowed through a gash in the roof filling bucket after bucket with water.

The next day we surveyed the damage.  After pulling a huge tree limb out of the roof it revealed a gaping hole.  Something had to be done so a huge blue tarp was strung across the house.  It was a temporary fix but it worked until the roof could be repaired and all could be made right again.

In a way, this is what has happened to our economic system and isn’t it appropriate that the government would name the portion of HR 1424 Emergency Economic Stabilization Act that is designed to stabilize home ownership T.A.R.P. (Troubled Asset Relief Program)

Many people ask me what this bill is all about and the answer is complex.  You see the bill is about a lot of things.  Some of what is in the bill is important, however I am sad to say that there is a lot in the bill that is not.  So let’s focus on what is important in the bill and for the time being, leave the pontification of what should not be there to the pundits.

One of the most important parts of this bill is the TARP (Troubled Asset Relief Program).  The TARP is the portion of the bill that gives the Secretary of the Treasury the authority to purchase non-performing and under-performing loan assets from banks.  This huge fund should start to get all of the bad loans out of the credit system so that the real value of the loan pools that are performing can be determined.

The American economy, our financial house, has just been through a really bad storm.  The TARP is there to temporarily cover the hole in the rough until it can be fixed properly.  It is truly and temporary fix.

However, don’t fret, there is a portion of this bill that is designed to permanently fix the hole and put our economic house in order.  After the Sec. Tres. buys these troubled assets he has several tools he can use to transform the troubled assets from worthless pieces of paper into valuable streams of income.

  • First, the bill gives the Secretary the ability to adjust non-performing loans.  The secretary can lower the interest rate, lower the loan balance or reset the loan to a 30 year fixed.  He can do one or all of these things to help the borrower stay in their home and to make the home affordable based on the current income of the homeowner.  This should allow the homeowner to start making their payments on time and should turn a non-performing asset with no value into a performing asset that can be sold for a profit.
  • Second, the Secretary has the authority to insure the payments on the new loan.  If the secretary feels that the new loan would sell faster and for more money in the tertiary market if it were insured, the secretary can add a premium to the payment.  This premium would insure the loan for up to 100% of it’s payment if it went into default.  Essentially this means that anyone purchasing the loan as an investment would have no downside risk.

As I said, there is much more in this bill that can be discussed.  Much of it has to do with technical issues relating to how banks lend to each other and how they borrower from the Fed.  The bottom line is that the TARP is the major portion of the bill that will help homeowners and that will stabilize the real estate markets.

So we’ve decided to do something about the hole in the roof caused by the storm.  We’ve put a TARP over it to stop the damage.  Now let’s hope our politicians have the knowledge and foresight to take the next steps to do the hard work to remove the TARP as quickly as possible and truly fix the gaping hole in our economic house.

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