How the Government Mortgage Bailout Affected the Economy and You
The Ways the Bailout Affects You Today
The government bank bailout affected the economy in three ways. First, it prevented future money market runs like the one that nearly caused an economic collapse. That happened a few days after Lehman Brothers went bankrupt. Investors moved the funds to U.S. Treasurys, causing yields to drop to zero. To stem the initial panic, the Treasury agreed to insure money-market funds for a year. The bailout signaled to banks that the government would do whatever it would take to restore confidence.
Second, the bailout allowed banks to start lending to each other again. Banks cut back on lending in April 2008. That made Libor rates unnaturally higher than the fed funds rate. A review of the Libor rate history reveals this discrepancy.
Banks that couldn't lend to each other were in danger of going bankrupt. That's what happened to Lehman Brothers. It would have happened to AIG, Bear Stearns, and the big three automakers without federal intervention. By restoring the credit markets to more normal functioning, the bailout bill gave banks the freedom to start making loans again.
Third, it made it easier for you to get mortgages and loans for cars, furniture, and consumer electronics. The Libor rate return to its normal level. That made loans less expensive so that more people could qualify for them. Consumer purchases began rising again, and that boosted economic growth. In addition, people started buying houses again, which allowed housing prices to stabilize.
Making Home Affordable
The bailout also created the Making Home Affordable Program. Between 2010 and 2018, it helped nine million Americans avoid foreclosure. It had two programs. One helped with refinancing and the other modified the loan.
The Homeowner Affordable Refinance Program refinanced loans. It was also called the Obama mortgage. It helped people before they fell behind in their payments.
HARP helped homeowners whose mortgage payment was more than 31 of their gross monthly income. They had to show a major change in their income or expenses that prevented them from paying the mortgage.
To qualify, homeowners had to fulfill three requirements. They had to have:
- Owned and occupied a one to four-unit home.
- Had a loan that started before January 1, 2009.
- Had an unpaid principal balance up to $729,750 for a single-unit property.
HARP helped the housing market a little. It allowed 810,000 credit-worthy homeowners to refinance with lower mortgage rates. Only 57,171 were more than 5 percent upside-down in their mortgages.
It could have helped more people, but banks cherry-picked applicants. They refused to consider those with lower equity, even though they were guaranteed by Fannie Mae or Freddie Mac. They wanted to avoid the paperwork involved with mortgage insurance.
In 2012, $35 billion of the bailout funded the Homeowner Affordable Modification Program. It helped homeowners avoid foreclosure by modifying their mortgages. HAMP used $12 billion of bailout funds in 2013. HAMP is no longer available. As of September 2018, it had helped 5 million homeowners avoid foreclosure.
How the Bailout Worked
The bailout bill created the Troubled Asset Recovery Program. The U.S. Treasury spent $105 billion to buy preferred stock in eight banks that were too big to fail. It spent another $245 billion to bail out AIG, the Big 3 auto companies, Citigroup, Bank of America, and hundreds of community banks. It also created the TALF program.
Congressman Barney Frank, former Chairman of the Housing Financial Service Committee, added these oversights to protect taxpayers:
- Bailouts could be no more than $250 billion each. As a result, only $350 billion was used in 2008. The rest of the $700 billion was never used.
- An oversight committee reviewed Treasury's purchase and sale of mortgages. Federal Reserve Chair Ben Bernanke, and the leaders of the Securities and Exchange Administration, the Federal Home Finance Agency, and HUD, sat on the Committee.
- Treasury could purchase an equity stake in companies in return for bailout funds. That's what happened. As a result, taxpayers made money from the bailout over the long run.
- There were some minor limits imposed on executive compensation of rescued firms. Companies could not deduct the expense of executive compensation above $500,000.
- The government-insured mortgage-backed securities and other assets that were purchased on March 14, 2008.
- The president was required to propose legislation to recoup losses from the financial industry if any still existed after five years. That was not necessary, as the government made its money back with a profit.
On February 18, 2009, Treasury launched the Homeowner Affordability and Stability Plan. It set aside $75 billion in TARP funds to help homeowners refinance or restructure their mortgages. It created the HARP and HAMP programs.
Taxpayers Made Money
After five years, banks paid back the bailout with interest. The $250 billion helped 700 banks. Treasury recouped $275 billion in principal and interest. That created a $25 billion profit for taxpayers. (Sources: "Rescue Bill Released," CNNMoney, September 28, 2008. "Monthly TARP Update," U.S. Treasury, May 2, 2016.)