Wondering what the U.S. Treasury might do with the cash flow from Troubled Asset Relief Program recipients' dividends? Rep. Barney Frank, D-Mass., has an idea: Craft them into yet another bailout.
Frank told The Boston Globe that he'd like to establish a program to help the unemployed pay their mortgages to avoid foreclosure. The plan would be funded by TARP dividends and allocate $2 billion in "loans" to pay the mortgages of the unemployed, who don't qualify for other programs.
Chalk this one up to a back-to-basics bailout or a bottom-up approach to bailing out the banks -- as Barry Ritholtz illustrated in his book "Bailout Nation," the kind of bailout the government used to focus on before the 1970s.
The plan would have the effect of helping the banks by decreasing the likelihood that homeowners would default on mortgages. However, it features a moral hazard issue as the homeowner might have less of an incentive to seek employment -- because we all know that state unemployment agencies don't really pressure people to look for a job.
There is no indication of how the loans would be administered and paid to the mortgage lender. Will it go straight to the lender, never to be touched by the homeowner? After all, some of these troubled homeowners aren't simply in trouble because they lost their jobs, but instead may have made some bad financial decisions. What's to stop someone from squandering the money other than the threat of foreclosure?
What the Globe does explain is Frank's inspiration, which was a 1975 program called the Emergency Housing Act that offered similar assistance at the end of one of the worst recessions since the Great Depression.
The plan is part of a larger $6.5 billion program from the $6.7 billion in dividends received. Frank calls the bigger program "TARP for Main Street," which would include money to rehabilitate foreclosed homes, help tenants whose landlords are amid foreclosure and build more affordable housing.
The last line item seems odd given the glut of homes already on the market, as illustrated by today's Wall Street Journal story about subprime woes and therefore counters the government's efforts to stem the collapse in home values.
But what do I know? I just have a B.A. in economics; I am not a congressman. - Matthew Wurtzel
See story about Frank's plan from The Boston Globe
See related story about subprime woes from The Wall Street Journal
See related story about financial decisions from The Deal magazine
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So now the employed will pay the mortgages of the unemployed?
To say that this plan “features a moral hazard issue” is like saying boating at Niagara Falls features a water hazard issue.
Foreclosure is a terrible thing…but it is not the worst thing…