Latest lending report reinforces TARP critiques

The Treasury Department recently released its monthly lending report that tracks the annual and monthly loan activity of the 22 banks that got the most public money through the Troubled Asset Relief Program.

The study says that although the economy continues to strengthen, it is still properly classified as weak.  Results and forecasts are mixed, as financial conditions improved slightly in some quarters while the more troubling areas continued their entrenchment and even decline.

Consumer optimism improved in December, mortgage rates remained at attractive levels, and there even was a small gain in payroll jobs in November (which fell again in December).  Overall loan originations in November rose 17 percent from a year earlier, although the outstanding loan balances among the 22 institutions remained largely unchanged from October.

Total loan originations fell in four categories over the month of November:  home equity lines of credit, other consumer lending products, renewals of commercial real estate loans and new commercial real estate loans.

Originations also rose in four categories: mortgages, credit card loans, renewed commercial and industrial loans and new commercial and industrial loans. Although first mortgage originations posted a modest 4 percent gain in November, the annual boost in originations was an encouraging 91percent.

Much of this increase can be attributed to refinancing fueled by favorable rates.  New home purchase originations fell 5 percent in November. Home-equity lines and increases fell 15 percent, and were down 45 percent over the past year.  Banks claim that the pool of qualified homeowners has shrunk while the value of most homes has depreciated, causing the home equity line market to tighten.

Favorable interest rates themselves have done little to curb the historic tide of home foreclosures. In addition, loan originations to small businesses -- an important generator of jobs and income -- fell by 18 percent in November. 

The most troubling news came, as expected, in the area of commercial real estate.  New commitments for commercial real estate loans fell a full 20 percent between October and November 2009, and annual numbers showed a 51 percent decline.

The report partly faults the lack of new construction activity as well as developers' reluctance to invest in new projects while companies downsize, the surplus of office space grows, and the overall commercial vacancy rate escalates.  Most of the banks indicated they would further limit their exposure to commercial real estate loans, as they expect the high delinquency rate to continue and a weak market to persist.

Seasonality must be taken into account when reading the report, as November is traditionally a slow time for new home purchases and other areas of consumer lending.

The latest report arrives late in the wake of the Congressional Oversight Panel's annual summary, Taking Stock: What Has the Troubled Asset Relief Program Achieved?  The Panel's critique of the program is more or less seconded by the recent numbers.  As the latest report notes, many of the largest TARP recipients "continued to focus on preserving liquidity, strengthening their balance sheets, building cash reserves and paying down existing debt rather than taking on new debt."  

Such strategies may solidify the standing of the banks involved, but they do little to stimulate the economy in the way TARP intended.  Credit remains difficult for most people and businesses to obtain.  Small bank failures, small business collapses and home foreclosures remain at a record high, due at least in part to the practices of the largest TARP recipients.

On December 9,  Treasury Secretary Timothy F. Geithner appeared before congress to announce that TARP would be extended until October 3 of this year. He emphasized that TARP investment in 2010 would focus on curbing home foreclosures, propping up small banks, and aiding small businesses and consumers.  These were areas flagged in Taking Stock as insufficiently addressed by TARP but essential to continued financial recovery.

It would appear that the largest TARP banks were unwilling to take such risks at the grass- roots level and that a second wave of effort was therefore necessary.  The specifics of the latest Treasury lending report seem to bear this out.

Bailoutsleuth will continue to examine the Treasury's monthly lending reports to see that TARP funding is applied in its intended manner and that the proposed remedies evince signs of economic recovery.