TARP watchdog: Main Street still not out of the woods

By Hibah Yousuf, staff reporter


NEW YORK (CNNMoney.com) -- Though the government's $700 billion Wall Street bailout package will be less of a financial burden than initially expected, plenty of big challenges remain for Main Street, a TARP watchdog said Tuesday.

In a report, the Special Inspector General for the Troubled Asset Relief Program noted that TARP losses are estimated to be $127 billion, mostly driven by funds for AIG, the automakers, and attempts at preventing foreclosures.

Financial institutions, meanwhile, have paid back $186 billion. While that's widely perceived as good news, the benefits have not been far reaching, said the special inspector general, Neil Barofsky.

"Even as Wall Street regains its footing, however, signs of distress on Main Street remain disturbingly persistent," wrote Barofsky.

Barofsky's biggest concerns are the progress in two key objectives of TARP: staving off mounting foreclosures and boosting small business lending.

Foreclosure program poses new problems

In March, Barofsky slammed the Treasury's Home Affordable Modification Program designed to address the millions of homes at risk of foreclosure.

Barofsky noted that foreclosure filings were up 16% in the first quarter of 2010, and that bank repossessions were up by 35%.

In the March report, Barofsky said the Treasury Department initially set targets that weren't "meaningful," mismanaged the implementation of the program, and risked a substantial number of "re-defaults," with many participants ultimately losing their homes anyway.

Barofsky said that the Treasury Department has since attempted to address those flaws. There are new provisions aimed at reducing mortgage payments for unemployed homeowners, and reducing principal for borrowers who owe more than their homes are worth. But Barofsky said the policies create new challenges for the agency.

"Treasury's urgency in rolling out the new initiatives, as laudable as it is, risks significant costs in the form of ill-defined goals, incomplete program guidelines, increased vulnerability to fraud, incentives that may prove ineffective, and the potential for arbitrary treatment of participating borrowers," Barofsky wrote.

Barofsky said that allowing lenders to judge whether borrowers merit a reduction in their principal may not eliminate the risk of re-defaults. He said loan providers are rewarded based on the total amount of outstanding mortgages they service, so they may have more incentive to modify mortgages without reducing the principal.

Barofsky recommended that Treasury reconsider the voluntary spirit of the principal reduction program to make to maximize its effectiveness.

Barofsky also said the Treasury's move to help unemployed homeowners doesn't go far enough. While the initiative provides at least three months of relief to job-seeking homeowners, the median length of unemployment at 21.6 weeks is much longer than that brief period, and average long-term joblessness is at a record high at 31.2 weeks.

Oversight needed for small-business lending

In February, the administration announced a plan to seek $30 billion in TARP funds to spur small-business lending, which remains depressed from pre-recession levels, Barofsky said.

The Treasury said the capital would be invested through Community Development Financial Institutions, which target more than 60% of funding to lending to small businesses in areas underserved by traditional financial institutions.

Though the funds would be operated outside of TARP, Barofsky suggested that the Treasury include the program in the inspector general's oversight provisions.

The Treasury agreed to institute careful screening of the institutions receiving the TARP funds and provide the inspector general with access to CDFI's records provided to the Treasury. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 17,779.62 1.47 0.01%
Nasdaq 4,760.77 12.37 0.26%
S&P 500 2,066.02 4.79 0.23%
Treasuries 2.18 -0.03 -1.18%
Data as of 11:50am ET
Company Price Change % Change
Bank of America Corp... 17.62 0.08 0.48%
Apple Inc 112.47 -0.18 -0.16%
General Electric Co 25.22 0.08 0.32%
Microsoft Corp 47.88 0.36 0.76%
Cisco Systems Inc 27.70 0.05 0.18%
Data as of 11:35am ET

Sections

Treasury sold its remaining shares Friday in Ally Financial, it's last remaining major stake from the $426 billion bailout of banks and the U.S. auto industry. More

Investors beware: These 5 global crises are likely to rattle the stock market and world economy. More

By backing down from showing "The Interview,"Sony has set a dangerous precedent. Hackers now have a blueprint for hurting American companies. More

Unilever sued Hampton Creek over its egg-free mayonnaise spread Just Mayo. But the company behind Best Foods and Hellman's mayonnaise has now dropped the lawsuit. More

Payday lenders are spending millions of dollars in Washington in an attempt to get powerful politicians on their side as a government crackdown on the industry heats up. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.