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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

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