TARP, Loan Modification And Other Disaster stories.

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The Credit Crisis of the last two to three years has changed the whole face of the economic landscape. The knee jerk reaction of the government didn’t take long to appear in the form of HARP, HOPE and other cute acronyms.

A program that hasn’t received half as much attention has been TARP. Maybe because the acronym is not as cute or because TARP is not as linked with reducing loan payments as with cleaning the mess when things don’t work out.

This article deals with what TARP is and what it means for homeowners as well as providing a short analysis how Loan Modifications have fared so far. TARP stands for Troubled Assets Relief Program which sounds nearly as bad as TARP which sounds like something you would paint on your fence to keep woodworm away, which is kind of what TARP is designed to do for Banks and foreclosures.

Enough bad illustrations, what is TARP all about and how is it linked to Loan Modifications?

Troubled Assets Relief Program (TARP) was established by the Secretary in consultation with the Chairperson of the Board of Directors of the Federal Deposit Insurance Corporation and the Secretary of Housing and Urban Development. What did such a venerably group of people prepare?

Well, Tarp is designed to provide lenders and loan servicers with compensation to cover administrative costs for each loan modified according to a set of standards. This was an important factor in cajoling banks into accepting the whole Loan Modification program. Banks and other loan servicers are designed to provide loans and receive payments not modify loans.

The government offered compensation in exchange of lenders re-tuning their administration to allow for faster loan modifications. This hasn’t quite worked as the government hoped, but more on that later. The second “job” of TARP is to provide loss sharing guarantees for certain losses incurred if a modified loan were to re-default. This is a kind of insurance for banks and other loan providers. This of course costs money. The government has set aside up to $100,000,000,000 for these purposes.

So what has been the result of all this investment, not only in TARP but also HARP, HOPE and other government sponsored programs? There is no doubt the government in the United States and other governments alike around the world have put a lot of energy and money into it. The results have been disappointing to say the least.

Many would say that the government is dealing with the wrong issues, that this is a credit crisis not a mortgage crisis. Others will grant that loan modification programs take time to prove themselves.

What are the figures so far? Nearly one in four loan modifications in the fourth quarter actually increased the monthly payments of homeowners. Which is a pretty bad result for loan modifications that are designed to make loan payments more affordable.

The re-default rate was about 50 percent where the monthly payments remained the same or increased, while it was 26 percent when monthly payments dropped.

That means that people are more likely to meet their monthly payments if they are cheaper… mmm, no surprises there.