March 1, 2010

Presidential Spending Authority Under EESA

By Douglas A. Thompson

The Emergency Economic Stabilization Act (EESA) of 2008, commonly referred to as the Troubled Asset Relief Program (TARP), is the $700-billion program meant to lend assistance to financial institutions and mortgagors. The program is hailed by some as providing financial stability; others revile it as a bailout for banks and over-leveraged borrowers.

Congress, in crafting the legislation, provided extraordinary spending privileges to the
executive branch of the U.S. federal government. The executive branch of government
gained the ability to develop policy, determine eligibility, purchase troubled assets, and
reduce foreclosures to homeowners. These programs are directed by the executive
branch through the Department of Treasury, with some assistance of Housing and Urban
Development (HUD). The Federal Housing Financing Agency (FHFA) is also involved
as conservators of Fannie Mae and Freddie Mac.

Not only did the executive branch gain the ability to develop and execute policy of how 
to spend the $700 billion in available funds, but the Congress allowed for a self-extension of 
the program. Treasury Secretary Geithner asked for just such an extension until the 
statutory limit of the program, October 3, 2010. In all, the EESA program will run for 
two full years. This starkly contrasts most congressional financial approvals, which fund 
government operations for single fiscal years through a normal budgeting process.

Congress does not hold onto the EESA purse strings directly, but through the statutory limit authorizing purchase of troubled assets (Section 115) through a Congressional Oversight Panel (Section 125) and some "considerations" (Section 103). The purchase limit has been stated to not exceed $550 billion, which meets the limit of $700 billion. The Oversight Panel is generally toothless in its ability to affect the development and execution of plans by the Treasury Secretary. This leaves the legislative "considerations" as the only limit on how Treasury Secretary Geithner can spend $700 billion in taxpayer funds.

The "considerations" in Section 103 defined some loose goals, such as "protecting the interest of the taxpayers" and "preventing disruption to the financial markets." The only strict limitation is contained in Paragraph 5 of Section 103 (12 USC 5213) that states admirable goals of non-preferential treatment.

12 USC 5213 Section 103. Considerations. [Page 6 of the EESA bill.]

In exercising the authorities granted in this Act, the Secretary shall take into 
consideration-

(5) ensuring that all financial institutions are eligible to participate in the 
program, without discrimination based on size, geography, form of 
organization, or the size, type, and number of assets eligible for purchase 
under this Act.

These "considerations" of how EESA monies can be spent will be tested with President Obama's recent announcement of stabilizing the housing markets of five states. It seems that certain geographical areas may have preferential treatment under such a program. Additionally, the only form of financial institution eligible for this assistance are state Housing Finance Agencies (HFAs).

President Obama today is announcing Help for the Hardest Hit Housing Markets. The program will apply to states that have suffered an average home price drop of over 20% from the peak. State and local Housing Finance Agencies (HFAs) in each state are already familiar with the urgent challenges facing their communities and have demonstrated the ability to address these challenges. For that reason, we will work with these HFAs to expand the capacity to help address these challenges, with $1.5 billion from the funds set aside for housing under the Emergency Economic Stabilization Act of 2008 (EESA).

The states that will participate in this program are California, Arizona, Nevada, Florida, and Michigan, as reported in the media. (Note: These five states also have close gubernatorial elections this fall.) There should be no disagreement that California, Arizona, Nevada, Florida, and Michigan are distinct geographical areas that will receive preferential treatment under Obama's proposed program. Clearly, this would go against the legislative "considerations" of EESA.

In the White House's announcement, there is a discussion that state Housing Finance Agencies would be eligible if they are "financial institutions."

Programs must meet funding requirements under EESA. These include that the recipient of funds must be an eligible financial institution and that the funds must be used to pay for mortgage modifications or for other permitted uses under EESA.

California's HFA, CalHFA, proudly promotes itself as acting like a specific "financial institution." It operates only in California and assists only Californians.

CalHFA was chartered as the State's affordable housing bank to make low interest rate loans through the sale of tax-exempt bonds. A completely self-supporting State agency, bonds are repaid by revenues generated through mortgage loans, not taxpayer dollars.

The Arizona Housing Finance Authority, Nevada Housing Division, Florida Housing Finance Corporation, and Michigan State Housing Development Authority all provide lending services, issue bonds, and generate revenue as financial institutions within their states. There should be no disagreement that a distinct "form of organization" will be preferentially discriminated by Obama's proposed program. Clearly, this would go against the legislative "considerations" of EESA.

We need to define "program," as the Troubled Assets Relief Program, Title 1, Sections 101 - 136 of EESA. This includes the "considerations" in Section 103, foreclosure-mitigation efforts in Section 109, and assistance to homeowners in Section 110.

Lastly, let us reread the fifth "consideration," as it is will solidify our discussion of what is acceptable to the legislature. There are two statements. No discrimination in the lending institution based on size, geography, or form of organization is allowed, or no discrimination on the size, types, and number of assets that can be purchased is allowed. Even if a financial institution has zero assets for purchase, they may not be discriminated against based on geography or form of organization.

12 USC 5213 Section 103. Considerations.  (Page 6 of the EESA bill.)

In exercising the authorities granted in this Act, the Secretary shall take into 
consideration-

(5) ensuring that all financial institutions are eligible to participate in the 
program, without discrimination based on size, geography, form of 
organization, or the size, type, and number of assets eligible for purchase 
under this Act.

It should be a simple conclusion to state that, if allowed to proceed, President Obama's announcement of providing specific assistance to specific forms of financial organizations in specific geographies is a violation of the "considerations" allowed under the EESA.