Financial Markets Rescue Package Q&A: Homeowners' Mortgages (6 of 10)

The federal government's Troubled Asset Relief Program (TARP)—created by the Emergency Economic Stabilization Act of 2008 (EESA) signed into law by President Bush on October 3, 2008—gives the U.S. Department of the Treasury authority to purchase "troubled assets" from financial institutions. The Faegre & Benson TARP Task Force has developed answers to some frequently asked questions about which institutions qualify to participate in the program and how the program is expected to work.

What are the provisions for altering homeowners' mortgages?

Q: When the government buys an asset, how does it impact residential homeowners and tenants?

A: The purchase by the government does not affect the legal rights of either homeowners or mortgage holders under the mortgages acquired. (§ 119(b)(1).)

Q: What duties does the government have to mitigate foreclosures and to encourage services to modify loans?

A: The Treasury Secretary must implement a plan to maximize assistance for homeowners and use his authority to encourage servicers to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures. (§ 109(a).) The Secretary may also use loan guarantees and credit enhancement to facilitate loan modifications to prevent avoidable foreclosures. (Id.) The Secretary is required to consent to "reasonable requests for loss mitigation measures" where it has the authority to do so. (§ 109(c).) The Secretary is also required to coordinate with the Federal Reserve Board, the Federal Housing Finance Agency, the Secretary of HUD, and other federal government entities that hold troubled assets to "attempt to identify opportunities for the acquisition of classes of troubled assets that will improve the ability of the Secretary to improve the loan modification and restructuring process, and, where permissible, to permit bona fide tenants who are current on their rent to remain in their homes under the terms of the lease." (§ 109(b).) Other federal government property managers, i.e. the Federal Housing Finance Agency, the FDIC, and the Federal Reserve Board, are given similar obligations. (§ 110(b).)

Q: How might the government mitigate foreclosures and encourage servicers to modify loans?

A: The EESA does not provide specific guidance on how the government may mitigate foreclosures or encourage servicers to modify loans that it acquires under the TARP. The sections which address the actions of "Federal housing managers"—i.e. the Federal Reserve Board, the Federal Housing Finance Agency, and the FDIC—require those entities to "encourage implementation by the loan servicers" of loan modifications if the "Federal housing manager" does not own the loan itself and to "assist in facilitating any such modifications." (§ 110(c).)

Q: What can the government do with servicing contracts?

A: The EESA does not contain specific provisions addressing servicing contracts. The EESA states that the Secretary "shall have authority to manage troubled assets purchased under this Act, including revenues and portfolio risks therefrom." (§ 106(b).) If the government purchases mortgages directly, it may be able to force changes to the servicer contracts. If the government purchases interests in securitizations, the contractual documents that govern those securitizations and the servicing of the underlying mortgages will control. In any event, the EESA does not specify what the management of servicing contracts may entail.