Is the Obama Mortgage Foreclosure Plan Legal?

While considerable attention has rightly focused on the failure of President Obama’s various mortgage foreclosure plans to actually lower the rate of foreclosures, few have bothered to even ask whether the plan is allowable under the TARP statute.


Alex Pollock at AEI first raised this issue during testimony before the Congressional Oversight Panel. Alex’s point is that TARP only allows the modification of mortgages that are actually acquired by the government. Recall the original purpose of the TARP was to buy “troubled assets.” In managing those assets, Congress required the executive branch to come up with a plan to assist the borrowers behind those troubled assets.


Apparently unlike the Treasury department, I believe we should go back to the language of the statute in determining what it allows and doesn’t allow. Section 110(b)(1) is quite clear: “to the extent that the Federal property manager holds, owns, or controls mortgages, mortgage backed securities…” Nowhere else in TARP is there any other ability to establish a mortgage modification program. In using TARP funds to pay for modifications of loans not owned by the federal government, the Obama administration is acting far outside of its legal authority under TARP.


Many, including myself, have criticized the TARP as a massive delegation of spending power from Congress to the Treasury Department. Such delegation is, in my mind, clearly unconstitutional. However, even within such a broad delegation, there are parameters in which Treasury must act. Treating TARP as simply a large pot of money to spend however Treasury chooses is nothing short of illegal.