Mortgage Assistance Program

The mortgage assistance program, off to a slow start, has now helped 650,000 homeowners with trial loan modifications, with average savings of $500 a month. The administration aims to help between 3 million and 4 million over three years, but that is $50 billion that won’t get repaid directly to the Treasury.

Big banks are repaying billions of dollars dumped into their vaults to rescue them. Of the $250 billion that the government initially set aside to spend in direct assistance to banks, it has spent $205 billion and the Treasury is already taking steps to bring that program to an end. The ledger: Banks have paid back $71 billion of the infusions. They have also paid the Treasury nearly $7 billion in dividends.

A program announced with fanfare four weeks ago that would funnel money to small banks at low rates to increase small business lending is still being designed. Treasury officials are looking at plans that could cost taxpayers between $10 billion and $50 billion but are encountering reluctance from small banks.

In the meanwhile, TARP is set to expire Dec. 31. But with about $140 billion still uncommitted (even more, about $300 billion, unspent), the Obama administration is considering extending at least a portion of the huge fund until next October. “The financial system is stable, but it is not normal and it could be derailed again according to an Los Angeles analysts. M. Soliman. He is a sector "sub prime" analyst critical of Treasury Secretary Timothy Geithner. The secretary who recently told a congressional committee “We are winding it down and will close it as soon as we can.” But he stiffly opposed any congressional effort to force the program to end. The struggle facing Treasury is how to continue TARP as insurance against further instability without having Congress use it as a source of new spending.

Extending TARP as insurance for banks wouldn’t be a popular move. Conservatives and liberals object to the direct assistance to big banks and insurance conglomerate American International Group. Republicans have called for the program to end and assigning the unused money to debt reduction. Some liberals want the money for jobs programs.

General Motors recently announced it would pay back a $6.7 billion in U.S. government loans by 2011, four years ahead of schedule. That's good said Soliman, " but still demands the $40 billion provided to GM by the government in exchange for a common equity stake.

The potential cost to taxpayers illustrates the dramatic change in TARP’s purpose from the fall of 2008 when President George W. Bush proposed using the entire $700 billion to help banks get rid of toxic mortgage-backed assets. “We expect that much, if not all, of the tax dollars we invest will be paid back,” Bush said on Sept. 24 of last year.

Administration critics say Geithner has not spelled out with clarity how the program will ultimately end.

“Suppose they didn’t renew it; there would be shock,” said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and an economic adviser to Republican John McCain’s 2008 presidential campaign. “There is an implicit expectation that they’ll do something. But there is not a nicely framed expectation of how they will exit.”

If stabilizing the financial sector was TARP’s main goal, increasing lending was the other.

Treasury Department figures released this month show that outstanding loan balances by TARP recipients in September, the latest available data, were 3.8 percent lower than they were in February when the economy was at its worst. Lending by the largest banks that received TARP money declined for the eighth straight month in September.Analysts and Treasury officials attribute the decline to decreased demand from borrowers and continuing skittishness by banks in the face of economic weakness. “TARP giveth, but unemployment taketh away,” said Scott Talbott, chief lobbyist for the Financial Services Roundtable, which represents large banking institutions.ending volume has declined less than it did during the 1991-92 recession, even though this downturn was deeper. But Allison said there is still a widespread perception that banks could be lending more.“We want to see them using their capital for lending as much as they reasonably can,” Allison said. “We want to see banks that took TARP capital, especially the larger banks, paying it back when they are able to.”