Obama Administration takes next step in global credit stabilization endeavor
"Treasury Proposes Plan To Purge 'Toxic Assets'," explains Scott Neuman at NPR, "The Obama administration launched its latest initiative to stabilize global credit markets Monday, with Treasury Secretary Timothy Geithner unveiling a $1 trillion plan to bring the government and private investors together to absorb banks' toxic assets and jumpstart new lending."
I went over to financialstability.gov---just one the new administrations open access/transparency in government initiatives---to follow up on what this plan entails, and to treas.gov to follow-up on the Emergency Economic Stabilization Act.
In short, the new Public Private Investment Program (see Fact Sheet here), to quote Neuman, ". . .is a plan to expand the new Term Asset-Backed Securities Loan Facility to start the Public-Private Investment Program for Legacy Assets — a partnership to acquire the bad loans. TALF would buy the loans from banks and then bundle them into privately administered investment funds that would be partially guaranteed by the Federal Deposit Insurance Corp."
My inbox is happily engorged with emails from various experts and spokespeople for this issue. I have been busy chewing and digesting on this news all day.
I'm left with two major concerns:
1. What are the regulations overseeing the transfer of the bad loans to this new partnership?
Our first mortgage was transferred (sold) three times in two years, and it was a good loan (probably why it sold quickly and easily). Each time we ended up with trouble----for example, one time the new company "lost" the payment we sent in, and tried to charge us late fees, etc. It turned out to be, as we knew, their error, but that could be catastrophic to people already in trouble. But the inconvenience and so forth isn't my major worry.
I'm actually worried that the new partnership will be able to renegotiate the terms of the bad loan. I like to think they are all well-meaning and will do a good deal that benefits the homeowner and partnership alike, but I have an understandable lack of confidence that this will always be the case.
There are two portions of the Legacy Loan FAQ that generate this concern:
- "With predetermined asset pools, the FDIC will conduct asset portfolio auctions
with private bidder participants to determine the most attractive bid and ultimate purchase price. An independent valuation firm will provide valuation advice to inform the Legacy Loans Program in its bidder selection." - ". . .the PPIFs will ensure that purchases are at prices that
give taxpayers and private investors substantial opportunities to
benefit. In addition, by offering a structure that allows banks to clear these assets off their books, the PPIFs
will complement other government programs designed to enable greater lending and restore economic growth."
I want to ensure that homeowners will not be left in an even worse position. That leads me to my second concern.
2. If any part of the loan is renegotiated or forgiven, will there be a tax penalty on the homeowners?
This sounds great, "Treasury has implemented programs to allow families to save on their mortgage payments by refinancing, assist responsible homeowners in avoiding foreclosure through a loan modification plan, and, alongside the Federal Reserve, help bring mortgage interest rates down to near historic lows."
But any transfer of loan or refinancing can cost the homeowner or create vulnerabilities and trouble.
In general, forgiven loans are considered income, and are taxed at the individually appropriate tax rate, which can be as much as 25% to my knowledge. This could cause some homeowners to owe thousands of tax dollars, right when they are already struggling.
I'm going to try to get answers about these issues. In the meantime, I'll share some of the information I've received.
Complete overview of the Public Private Investment program here.
Emergency Economic Stabilization Act
A Sample Investment In Toxic Assets
I'm reading through a press briefing by Sec. Geithner and will publish anything helpful from that, or will publish the entire transcript.
What do you think? What are your hopes and concerns?
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