What’s TARP? Does it Matter for Seller-Held Mortgage Notes?

If you’re interested in real estate, finance or whether the US economy is going to survive the recession, chances are you’ve heard of the TARP. TARP is a federal program and was the largest chunk of the 2008 bailout cycle. It stands for the Trouble Assets Relief Program . . . and true to its name, it’s kind of troubled. This affects real estate prices and consequently, the value of your mortgage note.

Under the TARP, the Treasury Department got the power to buy or insure up to $700 billion in “troubled assets” – basically, these are both the collateralized debt obligations (CDOs) that are partly backed by subprime mortgages and the financial institutions that invested in them. The government’s betting on the idea that since these institutions and CDOs are being sold out of proportion to the number of actual foreclosures, it can recoup losses incurred by panicked selling, while their ownership stabilizes market activity. The theory is that with the government backing these bad debts, institutions will stop hoarding money and start lending it again, injecting much needed credit fluidity back into the financial system.

Is this actually happening? This is where the TARP has problems. There is considerable evidence to suggest that the TARP’s recipients haven’t changed their lending practices in accord with the program’s aid.  Banks continue to lend less, making new housing purchases harder to finance and keeping the housing market – and every other part of the economy that relies on credit – depressed. Perhaps the most blatant example of institution heads ignoring the TARP’s goals was when Whitney national Bank chair John C. Hope said, “We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.”

There may be some light at the end of the tunnel, however. At the very least, many institutions that are hoarding government money do seem to be using it skillfully enough to survive the recession. On March 11, 2009, Citigroup informally announced that it was on the road to a Q1 2009 profit – if you ignored the bad debt on its back, which the TARP funds has essentially helped them do.

This means that if you’re thinking about managing a seller held note, don’t look for too much competition from institutional mortgages. Banks are still reluctant to make loans, so the demand exists for alternatives. On the other hand, real estate investments are still reeling, so even though people want seller-held notes, the base market value will not be as high. This is to be expected, given that real estate prices have been overvalued for years. If you can find a financially stable borrower seller held notes continue to be a workable strategy, but if market value concerns you it might be in your best interests to sell your note.