How the Government Mortgage Bailout Affected the Economy and You
The Ways the Bailout Affects You Today
The government bailout of 2008 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 as banks had cut back on lending in April 2008. That made Libor rates unnaturally higher than the fed funds rate.
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. People started buying houses again, which allowed housing prices to stabilize.
The Making Home Affordable Program
The bailout also created the Making Home Affordable Program. Between 2010 and 2016, it helped seven million Americans avoid foreclosure. It had two programs; one helped with refinancing and the other modified the loan.
The Homeowner Affordable Refinance Program (HARP) refinanced loans. It helped homeowners who had mortgages owned or guaranteed by Fannie Mae or Freddie Mac, two government-sponsored enterprises that buy loans. It allowed homeowners who had mortgages for more than 80% of the home value to refinance for lower interest rates.
To qualify, homeowners had to fulfill three requirements. They had to:
- Own a single-family home
- Close the loan on or before May 31, 2009
- Be up to date with their payments
HARP helped nearly 3.5 million homeowners (as of 2019), which is less than the 4 million or more the program was expected to help. 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.
The Homeowner Affordable Modification Program (HAMP) is another program that received $30 billion in funding. It helped homeowners avoid foreclosure by modifying their mortgages so that their monthly payments were no more than 31% of their monthly income. Lenders could reduce interest rates and take other measures to reduce the monthly payment. Both HARP and HAMP have ended.
How the Bailout Worked
The bailout bill created the Troubled Asset Recovery Program. The U.S. Treasury spent $442 billion to fund the Making Home Affordable Programs, bail out AIG, the big three auto companies, Citigroup, Bank of America, and hundreds of community banks.
Congressman Barney Frank, former Chairman of the Housing Financial Service Committee, added these oversights to protect taxpayers:
- 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.
- 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, which set aside $75 billion in TARP funds to help homeowners refinance or restructure their mortgages. It created the HARP and HAMP programs.
After five years, banks paid back the bailout with interest. In total, $634 billion was paid out across all programs and $744 billion was paid back, which means the government realized a profit of $110 billion.