President Obama signed the American Recovery and Reinvestment Act into law in February 2009. This paper aims at evaluating the impact the act had on homeowners and lending institutions on the loans they offer. The Act has provisions that affect businesses and individuals. It has introduced tax cuts, credit expansion for first-time borrowers, educational benefits, and transportation subsidies. In addition, the tax credit is offered to the health sector and the energy departments that produce and use energy-saving and efficient products.
The paper discusses the effects the Act has on homeowners and since it is aimed at avoiding closures, most people can benefit. The loans are provided at low-interest rates and refinancing programs are introduced. Modifications are to be done on the existing loans that are proving difficult to finance. There are also incentives aligned to these loans and those who can access the loans will benefit from the incentives.
The lending institutions have been affected significantly by this act. Various institutions have tried to implement the Act, and the treasury is undertaking surveys to determine the effectiveness of the Act. According to the Surveys, only 9% have implemented the modification programs. Most of the institutions are reluctant to undertake these programs because they do not want to fund individuals who have no collateral and securities. However, those that have accepted to undertake the programs are doing their best to ensure that the programs are effective.
The concluding part evaluates the effectiveness of the Act and it is possible that with time, the programs will be very successful and foreclosures will come to a complete end. The program should leave the country in a better state than it was before the recession began.
The Recovery and Reinvestment Act has been reviewed by many writers and institutions since it was passed as a law. Many try to evaluate the effectiveness of the act and the benefits that it has in the economy. It has been of great concern to the taxation department since it has programs, which affect the taxation policy. The IRS government has accessed all the provisions of the Act and the probable effect to individuals and businesses.
The benefits of the Act to state and local authorities are evaluated by the Butler Snow company, and it has produced numerous articles on the Act. They try to access how the money allocated in the Act through the treasury is finding its way down to the local jurisdictions. This team among others has followed the legislation since it was passed into law, and they continually analyze how the government is implementing the bill to ensure that the intended benefits are achieved (Butler par. 4-5).
The treasury does follow-ups to the institutions that lend the money since it is concerned with the circulation of funds in the economy. It evaluates how well the institutions are implementing the programs and the benefits that the borrowers are deriving. This act will still get more evaluation from writers and government publications since it is a long-term plan. The treasury is the key controller of this Act and it is responsible for monitoring the implementation by the lending institutions. Many academic websites and online publications have conducted researches on the impact of this Act on both individuals and the economy.
The American Recovery and Reinvestment Act of 2009 is a bill to bring back economic growth, job creation and empower America’s middle class. This is by making the infrastructure of the national modern, improving the energy independence, and health facilities, offering tax relief, and improving educational opportunities among other purposes. This Act was signed into law on February 17, 2009, by President Obama. It was to jumpstart the US economy and, to respond to the global financial and economic crisis. The Obama administration is committed to spending the recovery funds with a high degree of accountability and transparency so that the taxes paid can be accounted for. To achieve this, the managing, awarding, and supervision of the contracts will have to be in line with the objectives of the Recovery Act.
Provisions of the Act
The provisions in the Act would affect individuals and businesses. The money taken home by many Americans would be more so that, enough tax is deducted from their payments, and no other taxes are imposed thereafter. For the first-time homebuyers, the credit was expanded and the payback requirements were withdrawn. For potential buyers to qualify for this, they had to close on a home before December 1, 2009. It is also possible for buyers of the certain vehicle to less the taxes they paid to the state and local authorities, with no sales taxes. There are also, educational benefits and students and families can access credit to be able to pay the expenses associated with higher education. Subsidies in the transportation sector are increased and, transit and parking benefits are provided to the employer. The retirement board, social security, and veteran affairs board are to pay the economic recovery payments. The tax credit is increased for the homeowners who use energy-efficient products in their existing homes. The standards for the new law are higher compared to 2007, for those products that were qualified as energy-efficient. In addition, tax credit on health coverage increased to 80% from 65% for the health insurance premiums that qualified and this makes more people eligible for the scheme (IRS Government par. 2-7).
The role of the Act is evident in the spending of the state and local governments. Previously they have been forced to cut their spending and this is evident in the revenue falls. The effect of the Act is seen since their spending has significantly increased by 2.4% in mid-2009. The increased purchase of fixed investments has resulted from the implementation of the Act. The investment incentives to businesses also may have contributed to the investment increase. Another effect of the Recovery Act is the stabilization of the personal consumption component in the GDP. In the first quarter of 2009, it increased but in the second quarter, it declined. This could result either from the tax cuts, which were used to pay debts or for saving purposes.
For businesses, new withholding rates are introduced to be used for their employees and, the February withholding tables are supplemented by the new optional rates. Disconnected youths and returning veterans are now covered by the credit for new hires. In addition, businesses that use energy-efficient and saving facilities are entitled to incentives. To offset their losses, small businesses can claim their refund for the taxes they have paid in five previous years instead of the normal two years. Bonds are issued to qualified educational agencies to finance the land acquisition and construction expenses that are associated with public schools facilities. There is also a subsidy provided to employees by their employers if they lose their jobs involuntarily (IRS Government par.10-14). The table illustrates the percentage allocation to the various categories in the Recovery and Reinvestment Act in dollars.
|Program||$ in Billions||% of Total|
|State and local Govt.||144||18|
|Infrastructure and science||111||14|
|Schools and training||53||7|
Table 1: The Recovery and Reinvestment act, money allocation by category (Source: Tim Johnson, California Association for local Development)
The graph shows the percentage of the total amount in billion dollars allocated to each category of programs. The x-axis represents the various categories to which money was allocated and, the y-axis represents the percentage of the total amount of money allocated to each sector. The amount allocated for tax cuts was the highest followed by the amount for state and local government. This could be because the tax cuts would assist individuals and increase the amount of money they take home. The amount allocated to the schools and training institutions, energy and other sectors was the least. Ten percent was allocated to the social programs and social developments for community development purposes.
Impact of the Act on homeowners
Home mortgage loans are more challenging and the dreams of many people to become homeowners may create credit problems. The 2009 act, has offered the lowest mortgage rates in 52 years. Homebuyers should have the correct information for them to compare different lenders to ensure that they borrow at the best rate. The buyers should be able to evaluate the closing costs that is, the expenses associated with the mortgage. They should also be able to evaluate the different interest rates charged by the lending institutions so that they choose the best. The tax credit offered to first-time homebuyers has enabled more than 40% of Los Angeles citizens to purchase houses. The tax credit led to the recovery of the housing market. The low mortgage rates led to improved affordability and this motivated most of the first-time homebuyers. According to the homebuyers, the low rates contributed 70% to their decisions to purchase a home. The decision to encourage the purchase of houses was critical since the foreclosure rate was increasing at a high rate. There was sluggishness in sales in the housing market due to the tough economic times.
The plan aims at assisting those who had high-interest rates payments but could not qualify for refinancing, and the people who were at the risk of losing their homes. Many people will get out of bad mortgages, as money is available for lending to those who need it. However, lenders may make it hard for people with inadequate securities to qualify for the loans. The borrowers are required to show the financial hardships they are facing to the loan providers to avoid foreclosures. The scheme will only assist those homeowners who have made efforts to be up to date on their mortgage payments. This brings together the borrowers and investors to make it possible for the working Americans to stay in their homes. The home affordable refinancing program provides consistent and clear rules for any modification in loans. This will make the borrowers aware of what is required of them in any loans. It also offers incentives to loan borrowers. This has strengthened the hope and confidence of loan borrowers in facing tough times. Although the new rules make it hard for families who owe more than 80% of their home’s value to secure refinancing.
Low-cost refinancing has reduced monthly mortgage payments by many dollars in a year for many families. The plan helps homeowners who are struggling to pay the monthly mortgages yet, cannot sell the homes since the prices are so low due to the economic recession. Current job losses experienced in the last 14 months have resulted in the mortgage payments taking half of their income especially for those who are servicing loans with hidden charges. The plan provides stability and security to those who commit monthly payments to retain their homes. It has helped stabilize the prices of homes for those who are affected by foreclosures.
The Act protects communities and taxpayers by focusing on various modifications. There will be no payments made unless all the payments are planned around the principal. To get the modifications to an affordable and sustainable level, the lenders and borrowers have incentives aligned. The disadvantaged communities will benefit from the free counseling programs, which are aimed at improving communication and outreach. They will be offered by the Department of Housing and Urban Development and those borrowers with debts that are hard to service, must use the programs. There are also programs in place to track the data on how the programs are being implemented so that effectiveness of the programs is measured and necessary amendments are made. The families who are unable to maintain their houses under the plan will be provided with incentives so that, the damage caused to the financial sector by foreclosures is minimized. Borrowers are offered payments to cater for relocation expenses so that overall costs are minimized for both the borrower and financial institutions. To ensure that the foreclosed properties do not remain unsold and vacant, treasury offers to buy them to simplify their redevelopment and sale. The Act also promotes the liquidity and stability of the homeowners in the marketplace (Amarendra par. 7-9).
The plan will provide a boost to the slugging economy though it will not end the recession. The plan will assist the economy to achieve full employment by 2014. It will also assist in the boosting of the economy and the income of households is improved. Increased income has been an efficient way to boost the economy in the recession period. The tax revenues have greatly fallen as profits of companies, property values, and retail sales have fallen. The employment level in the hospitality industries has been lifted and health and education facilities have benefited considerably.
Impact of the Act on lending institutions
Normally, many companies sell their loans as security to investors and this offers them new capital for other loans. This results in to increase in lending amounts by the secondary markets to the businesses. The banks have become reluctant to fund businesses since they depend mostly on secondary markets to raise cash. The unlocking of secondary markets by businesses will enable the purchase of already packaged securities. This increases the bank’s confidence because they know the treasury will buy the loans in the secondary markets. In addition, fees for borrowers have been eliminated by the small business administration. This has led to job creation and the development of the community besides, modernization of the economy. The access of funds to small businesses has been made easier since the investment funding has been made available in the recovery act. The companies that are in a better position will benefit greatly from the Recovery Act.
Some lending institutions are trying to blame the recovery act that is aimed at enabling households to own homes. They are blaming the modification of mortgages for the reduction of the lending standards for the institutions. Others have blamed the Act for the mortgages disaster. The act imposes various amendments in the private and public lending institutions. The Emergency Economic Stabilization Act is amended and restrictions are imposed on employees’ compensation. They are required not to limit the salaries payable to employees and, this applies to all institutions the will receive the Troubled Asset Relief Program (TARP). The incentives to the senior executives are prohibited for the many unnecessary risks that are a threat to the value of TARP. The compensation strategies that would involve any manipulation of the earnings are prohibited and, it is a requirement that the compensation made to the top twenty employees and senior employees be accounted for (Lane p. 1).
The Act also prohibits termination of employment benefits but only requires that the benefits for the services offered, be paid to five employees who are highly paid and the senior employees. Termination benefits are only restricted to only one-year compensation covering 25 highly paid employees, except for the institutions like Citibank, AIG who receive exceptional support for financial recovery. Bonuses and retention grants are prohibited to certain employees who receive high payments. Shareholders are expected to vote for the compensation of executives in public institutions, which requires to be revealed under the rules of compensation disclosure of the senior executives (Lane pp. 2).
Firms have been slow in implementing modification programs on mortgages. It is only nine percent of the borrowers have used the modification programs. The table below shows 9% of the largest service providers use the modification program.
|Service provider||Modification progress in %|
|Saxon Mortgage Services||25|
|Aurora loan services||21|
|Chase home finance||20|
|Wells Fargo Bank||6|
|Bank of America||4|
|Select portfolio servicing||3|
Table 2: Service providers implementing the modification programs on mortgages in percentage (Source: Tami Luhby, 2009).
The chart shows the service providers that have accepted the modification programs on home mortgages in the Recovery and Reinvestment Act. The nine percent includes nine service providers. Saxon mortgage services, is leading by the highest percentage of 25% followed by Aurora loan services provider. Select portfolio servicing and the Bank of America is the lowest in terms of implementing the modification programs. All these service providers are in the progress of implementing the programs.
The progress report is aimed at evaluating the performance of the service providers so that the institutions that are not implementing the plan are seen. Institutions have modified payments of about 15 % of those behind their loan servicing. The response to the modification is uneven for the service providers. Most of the service providers are committed to assisting homeowners and avoiding foreclosures. They are also doing other modifications which are necessary although might not be included in the plan. Wells Fargo was able to give trial agreements to its borrowers within two days. It will be in a position to enroll borrowers permanently if they meet the basic requirements. During the trial period, the service providers will be able to obtain substantial information to evaluate whether they qualify for stable modifications.
Borrowers are accusing their service providers of sluggish decisions regarding their applications and even losing the paperwork at times. Lending institutions have responded to these acquisitions and said that they are training their staff and upgrading their computer systems to accommodate the applications. Treasury officials are assisting the lending institutions to ensure that they implement the program with ease. Michael Barr the financial institution’s assistant treasury secretary said that the lenders must respect their borrowers and respond to their applications on time. He required the lenders to move quickly and do more to stop any more foreclosures.
Though participation is voluntary, once the institution offers to participate, it must offer a trial program to those who qualify. The plan assists the borrowers who are prone to defaults. Loan adjustment will recover more value on the home than a foreclosure. The homeowner has to pay on time three times for the adjustments to be made permanent. If the lending institutions increase participation, they will receive numerous incentives on these programs (Tami par. 8-9). Most of the institutions are undertaking programs to help the nation cope with the effects of the recession. Financial institutions will be required to conduct trial surveys and if they work, they can recruit the borrowers in the programs permanently.
Since the nation is facing financial problems, the government has come up with a financial stability plan. The banks have contributed to the recession because; instead of providing credit to individuals and institutions, they have opted for a credit freeze. The plan is to help the businesses with ideas to access credit that will help them expand their activities to get to the point of economic recovery. For the plan to be successful, the credit crisis and the uncertainty of the future need to be addressed. The Recovery plan is one of the plans to ensure that financial and economic stability is achieved. The plan protects against excess recession effects. The banks will be more confident since their capital level is enough even at the toughest times. The provision of loans with low-interest rates reduces the probable negative effects on the economy. The taxpayers can only be protected by ensuring that all the money they are taxed is provided for lending and all the taxes collected are accounted for.
The Recovery and Reinvestment Act is designed and budgeted to cover more than ten years. For each year, funds are budgeted to cover the tax cuts and the other tax incentives. They are also provided to the lending institutions to provide them with the funds to lend out for loan purposes. The Act will enable financial institutions to attain stability and increase their capital base in times of global crises. The housing market is also boosted and hence it can recover. Individuals are also assisted in attaining stability in their financial status and the tax burden is reduced. They can acquire homes with ease, unlike in the past where they had to pay for mortgages with very high-interest rates.
Since mortgage loans could be very hard for families to finance, the Act has assisted many families with its low-interest-rate provisions. With the current global financial and economic crisis that affected the economy of the country, most people are at stake of losing their jobs and this will make it difficult for them to meet their monthly repayments. This could lead to foreclosures making many American families homeless. The Obama administration is determined to ensure that Americans remain in their homes during this crisis of financial instability. Thus, the Recovery and Reinvestment Act is aimed at bringing together the borrowers, lending institutions, and the government to ensure that financial stability and consumer confidence are achieved. When the Act becomes effective, the most first-time buyer will benefit and Americans will be able to afford and retain their homes. The Act will enable Americans to be in a better position when the financial crisis ends.
Amarendra, Bhushan. “What is US Treasury Mortgage Modification Program?” 2009. Web.
Butler, Snow. “The American Recovery and Reinvestment Act”. 2009. Web.
IRS Government. “The American Recovery and Reinvestment Act of 2009”. Web.
Lane, Powell. American Recovery and Reinvestment Act of 2009: Implications for the Financial Institutions. London: Lane Powell, 2009.
Tami, Luhby. “Obama mortgage rescue: only 9% getting help”. 2009.