The Rise and Fall of the Troubled Asset Relief Program (TARP)

The US capital building at dawn.

How the Troubled Asset Relief Program (TARP) Impacted Real Estate

Simply put, Troubled Asset Relief Program (TARP) was a $700 billion bailout program in 2008 authorized by Congress through the Emergency Economic Stabilization Act of 2008 with the purpose of mending the financial situation of banks, housing, global credit markets and restoring market stability.

History of Troubled Asset Relief Program

In 2008, Americans experienced the worst economic crisis since the Great Depression. This economic crisis led to a troubled financial situation within the housing and banking industry. The housing industry experienced a massive number of foreclosures, and the banking industry was at the brink of collapse. Even global markets such as Fannie Mae, Freddie Mac, and American International Group (AIG) experienced serious financial problems and almost came to a standstill.

To keep the banking industry operating under this crisis, and prevent the economy from spiraling out of control, President George W. Bush signed the Emergency Economic Stabilization Act of 2008 into law.

TARP was signed into law to strengthen market stability and to improve the financial situation of the banking, housing, and the auto industry by purchasing stocks in eight major banks (Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan, Wells Fargo, Morgan Stanley, State Street), auto industry and insurance companies. Loan funds were also made available to financial institutions and homeowners to prevent foreclosures and short sales.

How the Troubled Asset Relief Program Worked

The Troubled Asset Relief Program worked by making funds and equity investments available in key troubled assets to stabilize financial institutions, housing sector, automobile industry and the global market. Through TARP, funding was made available to keep credit flowing for consumers and businesses to stabilize a collapsing economy and prevent a second major depression.

By organizing bailouts in five major areas — automotive, banking, credit, housing and insurance industries — TARP was able to provide liquidity within these markets and recover the economy. From 2008 to 2010, TARP invested $475 billion in these industries by purchasing stock in banks, insurance companies, and the auto industry. Funding in the form of loans was also made available to financial institutions and homeowners.

The following were the allocations within the TARP program:

  • $259 billion was allocated to provide cash flow to banks.
  • $70 billion was dedicated to stabilize the auto industry.
  • $27 billion was dedicated to restart credit banks.
  • $70 to bolster the American International Group (AIG).
  • $46 billion was dedicated to the Credit and Housing sector to help Americans avoid foreclosure.

The Problem With the TARP Program for Homeowners

TARP was created to restore the economy by infusing funds into the banking, auto, housing, and money markets. However, the TARP bailout still failed homeowners.

The program failed in its attempt to make successful purchases and modify mortgages to prevent foreclosure for homeowners. The problem was with the banks. The TARP program gave banks enough lending power, but the banks didn’t increase lending as expected. They were too wary that the bailout program might not work, so they cherry-picked applicants and refused to consider those with lower equity. Out of the 4 million foreclosures that TARP was proposed to prevent, just fewer than 800,000 foreclosures were avoided before the end of 2010 when the TARP program expired. By the end of year 2010, about 2.9 million homes had received foreclosure filings.

Lessons Learned

The TARP program was aimed to counter the financial crisis and restore financial stability to troubled assets by having the government buy mortgage-backed securities and bank stocks. TARP did manage to stabilize financial institutions. But, it still failed to stem the foreclosure crisis at that time.

It is difficult to argue if TARP was a failure or a success. The case with TARP was complicated at the time and its effectiveness will continue to be debated and analyzed for years to come.

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