What is TARP?
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UPDATED: Aug 3, 2021
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TARP is the Troubled Asset Relief Program and was passed into law on Oct. 3, 2008 by President George W. Bush.
It was created by the U.S. government after the recent financial crisis. It was implemented to purchase equity and assets from financial companies in the hopes of strengthening the financial sector. While the federal government used TARP funds to assist many large financial organizations, its main purpose was to prevent foreclosure on thousands of American homeowners.
The program allows the U.S. Treasury to purchase or insure up to $700 billion of troubled assets, which are defined as residential or commercial mortgages or any other financial instrument that promotes financial market stability. This allows the Treasury to purchase difficult-to-value assets from financial institutions and banks.
Some of the companies that have received TARP funds include banking giants Citigroup, Bank of America, JPMorgan Chase, Wells Fargo, and auto manufacturers such as General Motors and Chrysler. While arguments were made about the largest banks receiving a certain portion of the TARP funds, it was done in hopes to also prevent layoffs and protect jobs.
Although Congress authorized $700 billion for the TARP program, to date, only $417 billion has been disbursed. Currently, American taxpayers have already recovered 89 percent, or $371 billion of the total TARP money.
What Affect Did This Have on Business Lending?
At the beginning of the financial crisis, when the market crashed, investors quickly withdrew billions from money market accounts. This caused a significant drop, and subsequent pause, on the availability of business loans. Due to the lack of business lending, even on short-term agreements, many businesses struggled to remain afloat. This put jobs in virtually all sectors at risk.
One contributing factor of economic growth and recovery is business. TARP was partially implemented to help stimulate business lending once again by providing lenders like Bank of America with the funds they needed to stabilize their own books.
But TARP did not just impact business loans. It addressed the subprime mortgage crisis. It was legally required to be conducted as to protect home values, college funds, and retirement accounts and to promote jobs and economic growth.
In recent news, concerns have arisen about the program’s efficacy for stimulating small business loans. TARP planned to raise capital at smaller banks and create small business loans through The Small Business Lending Fund. But instead of giving out small business loans, many banks used the money from the lending funds to remove TARP debt. The Fund eventually became a quasi-bailout for a large portion of banks.
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How Did TARP Affect The Future of Mortgage Loans?
When financial institutions see risk, they run the other way. This could mean reducing jobs, not lending to subprime borrowers, or not generating new loans at all. TARP was able to stabilize the market, which in turn freed mortgage lenders like Bank of America to keep issuing mortgage loans to a diverse set of borrowers. It also prevented mass foreclosures and a collapse of the mortgage lending system.
Some critics believe the program was beneficial for large banks, and hurt small businesses, but for better or for worse, TARP impacted the U.S. economy in a powerful way.
This means consumers with varying credit scores and other circumstances are still able to buy cars, homes, go to school, and otherwise move on with their lives financially speaking. Certain credit markets were more impacted by this stabilization than others.
TARP funds also went to businesses that subsequently hired or retained American workers. The bulk of TARP funds from the federal government went directly to helping homeowners avoid foreclosure.
Do You Need A Loan?
Financial institutions have stabilized since TARP was needed. While they will continue to go through ebbs and flows to avoid another financial crisis, the market for subprime auto, mortgage, and other loans has continued within certain constraints. For borrowers with good credit, stable income, etc., there are even more options with lower rates.