Congress Passes Largest Financial Bailout Bill Since the Great Depression


Following two weeks of hand-wringing in Washington, D.C., and market tremors on Wall Street, Congress reversed course and passed a historic $700 billion government bailout of the disintegrating financial industry on October 3, 2008 by a vote of 263 to 171. The Emergency Economic Stabilization Act of 2008 ("EESA"), spearheaded by Treasury Secretary Henry Paulson, went from a three-page proposal to a 450-page catalog, augmented by a long list of tax incentives and spending earmarks. Most importantly, the legislation gives the Treasury Department blanket authority to use the designated funds to purchase, manage and sell "toxic" assets held by financial institutions in order to address the worst credit and liquidity problems in the United States since the Great Depression.


What This Means for the Mortgage Lending Industry

TARP's definition of the words "troubled asset" is very helpful for the mortgage lending industry, as it specifically directs aid to mortgages and mortgage-related instruments and services. This infusion of capital should relieve some of the pressure created by a rising tide of subprime mortgage defaults and free up resources to resume healthier lending practices. EESA gives the Treasury Department a diverse toolbox for assisting existing mortgage holders, in addition to authority to purchase such assets outright. Depending on the specific mortgage package or related instrument at issue, a lending institution may seek either to be relieved of the instrument entirely by selling it to the Treasury Department under EESA, or the institution may avail itself of EESA assistance options for alleviating the risk of foreclosure. In either case, the lending institution is likely to take a loss against the original terms of freely entered mortgage contracts.

However, even if the mortgage lending industry manages to get out from under the crushing weight of high-risk subprime mortgages, and even if more capital becomes available for lending again, ...

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