TO THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 (CURRENT UPDATE) - - PDF document

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 1

POSITIONING REAL ESTATE AND LENDING PRACTITIONERS TO RESPOND TO THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008

(CURRENT UPDATE)

INITIAL IMPLEMENTATION OF THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 THROUGH THE TARP CAPITAL PURCHASE PROGRAM

Presented by Sandra G. Porter, Shareholder at Carlton Fields, P.A. and Supervisory Council Member for the Real Estate Financing Group of the ABA Real Property Trust & Estate Law Section On October 14, 2008, the U.S. Treasury (the “Treasury”) announced the establishment of the TARP Capital Purchase Program (the “Program”) under the authority of the Emergency Economic Stabilization Act of 2008 (the “Act”). The Program is designed to increase market stability through the purchase by the Treasury of equity stakes in banks and thrifts to encourage the banks and thrifts to provide credit to the U.S. economy. AUTHORITY The Act provides that the Secretary of the Treasury (the “Secretary”) may purchase “any…financial instrument that the Secretary, after consultation with [the Chairman of the Federal Reserve], determines the purchase of which is necessary to promote financial market stability….” The Treasury has stated that it is under this authority that it is establishing the Program. GENERAL OVERVIEW The Program makes $250 billion available to U.S. banks, savings associations, and certain bank and savings and loan holding companies only engaged in financial

• activities. The $250 billion, which is part of the $700

billion available through the Act, will be used by the Treasury to purchase senior preferred stock (the “Senior Preferred”) that will qualify as Tier 1. Capital Eligible entities have until November 14, 2008 to seek

• participation. All of the Senior Preferred purchased in the

Program will be subject to a standard set of terms. Nine

• f the largest U.S. financial institutions have already

indicated to the Treasury their intentions to participate. TERMS The Senior Preferred shall be non-voting except for votes

• n matters which may adversely affect the rights of the
• shares. The Senior Preferred will rank above common

shares and will be equal, in rights, to the Participating

For more than a century, Carlton Fields, an AmLaw 200 law firm, has been recognized as one of the most trusted, skilled, and effective law firms in the U.S. Our lawyers and government consultants are regarded as highly skilled professionals who get the job done through diligence and unparalleled commitment to the highest standards of client service. It is a reputation we earn every single day,

• ne case and one transaction at a

time. If you have questions, please contact:

• Sandra G. Porter

Shareholder | 813.229.4232 sporter@carltonfields.com Prepared with the assistance of: Jason W. Brant Associate | 561.650.0338 jbrant@carltonfields.com Matthew S. Ellish Associate | 305.539.7365 mellish@carltonfields.com Charles M. Harrell Associate | 404.815.2717 charrell@carltonfields.com Angela M. Ligouri Associate | 404.815.2719 aligouri@carltonfields.com Gregory G. Schlich Associate | 404.815.2713 gschlich@carltonfields.com With special thanks to: Edgel C. Lester, Jr. Shareholder | 813.229.4231 elester@carltonfields.com Jay A. Steinman Shareholder | 305.539.7219 jsteinman@carltonfields.com www.carltonfields.com

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 2

Institution’s highest level of preferred stock. The minimum subscription amount for an institution participating in the Program (a “Participating Institution”) is 1% of risk-weighted assets and the maximum subscription amount is the lesser of 3% of risk-weighted assets and $25 billion. The Senior Preferred will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. If, however, the Senior Preferred is issued by banks that are not subsidiaries of holding companies the dividends will be non-cumulative. While the Senior Preferred is outstanding and unless the Treasury has been paid all dividends due and accrued, if applicable, then the Participating Institution cannot declare dividends for or repurchase or redeem the shares of holders of junior interests. All redemptions of issued Senior Preferred must be at 100% of its issued price. After three years, the Participating Institution may redeem the Senior Preferred with very few

• restrictions. Also, after three years, the Senior Preferred is callable at par.

Further, each Participating Institution, through its participation in the Program has agreed to comply with certain terms of the Act. Each Participating Institution must grant warrants to purchase common stock to the Treasury and also must comply with certain executive compensation guidelines. ACCOMPANYING WARRANTS The warrants will provide the Treasury with the right to purchase common stock in the Participating Institution. The term is ten years and the warrants are immediately exercisable, in whole or in part. The Treasury will agree not to exercise the requisite voting power upon the exercise of the warrants. The warrants will have a market price, in the aggregate, equal to 15% of the Senior Preferred. The initial exercise price is the market price for the common stock on the date of the Senior Preferred investment; this price is calculated on a 20-trading day trailing average (the “Initial Exercise Price”). If the Participating Institution does not have the authorization to issue the underlying shares, the terms of the warrants require the Participating Institution to take the steps necessary to get such authority. If such authority is not obtained, the terms provide for a reduction of the Initial Exercise Price over time. If the Participating Institution is unable to obtain the required authorization or is no longer listed on a U.S. securities exchange or association, the Treasury will have the option to exchange the warrants for senior debt or another equivalent instrument. ACCOMPANYING EXECUTIVE COMPENSATION RESTRICTIONS While the Treasury holds the Senior Preferred, each Participating Institution must adopt, maintain and agree to continue to be bound by the Treasury’s executive compensation and corporate governance standards provided for in the Act as well as all regulations or guidance released by the Secretary to further the provisions and principles of the corporate governance and executive compensation sections of the Act. A Participating Institution and

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 3

its senior executive officers must also provide the Treasury with a waiver releasing the Treasury from any and all claims that the senior executive officers may have as a result of the issuance of any such regulations or guidance by the Treasury. ISSUES TO WATCH MOVING FORWARD

• What impact will the implementation of the Program have on the momentum of the
• ther facets of the Act that the Treasury is actively pursuing, such as the mortgage-

backed securities purchase program, the whole loan purchase program and the insurance program?

• In announcing the implementation of the Program, the Treasury stressed that it would

continue to emphasize its efforts to preserve homeownership. In what facet, if any, of the Program or the Treasury’s overall implementation of the EESA will we truly see homeownership preservation stressed? Will the public demand that Congress take direct action regarding homeownership preservation if the public does not see a direct act by the Treasury soon?

• Given the public’s thirst for corporate governance oversight and executive

compensation restrictions, how far will the Treasury go in its guidelines and regulations regarding these requirements? The Program did not take the huge step of providing specifics regarding these requirements and the Treasury has said that it is still formulating such requirements.

• What portion of the $250 billion will be committed to these initial nine Participating

Institutions? It has already been reported that they could consume over $120 billion

• f the available $250 billion.
• Will all institutions wishing to participate have the opportunity to participate? The

Treasury has announced that they foresee a wide array of Participating Institutions. Treasury has announced that it will provide assistance to those institutions for which the assistance will provide the greatest help in stabilizing our markets. What specifics will the Treasury use in applying this principle?

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 4

POSITIONING REAL ESTATE AND LENDING PRACTITIONERS TO RESPOND TO THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008

(PART I)

Presented by Sandra G. Porter, Shareholder at Carlton Fields, P.A. and Supervisory Council Member for the Real Estate Financing Group of the ABA Real Property Trust & Estate Law Section In light of the Emergency Economic Stabilization Act of 2008, H.R. 1424 bill passed by Congress and signed into law by the President on October 3, 2008 (the “Act”), this article is intended to assist real estate and lending lawyers in positioning themselves and their practice in this evolving economy and crisis. Division A of the original bill includes a variety of measures designed to bring liquidity and stability to the United States financial system. Divisions B and C of the original bill include other legislative acts, including tax incentives related to energy and relief from the alternative minimum tax. This article will only address Division A of the Act, which is the

• nly portion of the bill that directly relates to the real estate

and lending industry. Carlton Fields has formed a team of shareholders and associates for purposes of reviewing and analyzing the Act. Article I below discusses certain opportunities and concerns for real estate and finance industry participants. Article II highlights benchmark dates identified in the Act. And, Article III provides a brief summary of the various provisions

• f the Act as signed into law on October 3, 2008. Any

initial capitalized terms used herein but not otherwise defined shall have the meanings given in the Act. This analysis only addresses issues we have deemed to be of interest to parties involved with real estate and lending. The fact that we do not address a certain issue or provision set forth in the Act does not mean that it does not have implications or consequences of importance to particular readers.

For more than a century, Carlton Fields, an AmLaw 200 law firm, has been recognized as one of the most trusted, skilled, and effective law firms in the U.S. Our lawyers and government consultants are regarded as highly skilled professionals who get the job done through diligence and unparalleled commitment to the highest standards of client service. It is a reputation we earn every single day,

• ne case and one transaction at a

time. If you have questions, please contact:

• Sandra G. Porter

Shareholder | 813.229.4232 sporter@carltonfields.com Prepared with the assistance of: Jason W. Brant Associate | 561.650.0338 jbrant@carltonfields.com Matthew S. Ellish Associate | 305.539.7365 mellish@carltonfields.com Charles M. Harrell Associate | 404.815.2717 charrell@carltonfields.com Angela M. Ligouri Associate | 404.815.2719 aligouri@carltonfields.com Gregory G. Schlich Associate | 404.815.2713 gschlich@carltonfields.com With special thanks to: Edgel C. Lester, Jr. Shareholder | 813.229.4231 elester@carltonfields.com Jay A. Steinman Shareholder | 305.539.7219 jsteinman@carltonfields.com www.carltonfields.com

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 5

Carlton Fields will be monitoring the effects of the Act on the real estate and finance sectors and will provide periodic updates as new information becomes available. We encourage you to provide feedback to Carlton Fields regarding questions

• r

comments

• n

issues

• f importance to you. Please feel free to direct questions
• r comments with respect to this article to the following

individual: Sandra G. Porter Shareholder Carlton Fields 4221 W. Boy Scout Boulevard, Suite 1000 Tampa, Florida 33601-3239 +18132294232 sporter@carltonfields.com

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 6

TABLE OF CONTENTS

Guidance for Real Estate and Lending Practices ............................................. 7 Considerations and Opportunities for Financial Institutions that Own Troubled Assets .................................................................................. 7 Considerations and Opportunities for Entities that do not Qualify as "Financial Institutions" or do not have Troubled Assets to Sell .......................... 15 Benchmark Dates for Further Policy and Amendments................................ 17 Brief Summary of Act....................................................................................... 20 Troubled Asset Relief Program.......................................................................... 20 Troubled Asset Insurance Program .................................................................... 20 Upside Participation Requirement ..................................................................... 20 Executive Compensation Restrictions ................................................................. 21 Administration and Oversight of Programs......................................................... 23 Homeowner Relief .......................................................................................... 24 Recoupment ................................................................................................... 26 Changes to FDIC and Federal Reserve Authority................................................. 26 Exchange Stabilization Fund Reimbursement...................................................... 26

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 7

I. GUIDANCE FOR REAL ESTATE AND LENDING PRACTICES At this time there is a still considerable uncertainty regarding how the programs authorized under the Act will operate. This Article I is designed to guide real estate and lending attorneys in advising their clients whether and how they can take advantage of the

• pportunities presented by the Act.

A. Considerations and Opportunities for Financial Institutions that Own Troubled Assets 1. What types of entities can sell their assets under TARP

• r have their assets guaranteed through the Insurance

Program? Any financial institution is eligible to sell its Troubled Assets to the Secretary of the Treasury (“Secretary”) under the Troubled Assets Relief Program (“TARP”) more particularly described in Article III below, or have its Troubled Assets guaranteed pursuant to a program established by the Secretary (“Insurance Program”).1 “Financial Institutions” under the Act include a broad range of entities, including but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company. These institutions must (a) be established and regulated in the United States (or any State, territory

• r possession), and (b) have significant operations in the United States.2 All financial

institutions are eligible regardless of their size, geography, form of organization, type, or number of assets.3 The following entities are not considered financial institutions under the Act: any central bank of, or institution owned by, a foreign government, unless such institution holds Troubled Assets as a result of financing other “financial institutions” (U.S. lenders) that have defaulted on their financing.4 There are a number of unanswered questions regarding the scope of eligible institutions, particularly with respect to financial institutions that are part of foreign banks or partially

• wned by foreign governments. For example, the sufficiency of the local operations that is

required to have “significant operations” in the United States is unclear. We expect the significance will be determined by comparing the bank’s operations in the United States to the bank’s entire operations within and outside of the United States. In addition, the definition of financial institutions itself uses the language "including, but not limited to” when describing the types of entities that are within the scope. Thus, other non- bank affiliates and financial institutions that are regulated by the federal government could be able to participate in these programs. Given the expansive scope of this definition, lenders of all types that are regulated in the United States should feel free to pursue

1 Sec. 101(a)(1); 102(a) 2 Sec. 3(5) 3 Sec. 103(5) 4 Sec. 3(5); 112.

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 8

| Selling Institutions should demonstrate long term viability, a history of good asset management, strong financial prospects following a sale, the existence of any eligible retirement plans, and any service provided to underserved communities to increase their chances of selection. |

discussions with the Secretary, even if they are not one of the specifically enumerated entities. Noticeably, hedge funds and private equity funds are not listed as expressly included in this definition. These funds are presumably excluded because they are not regulated under United States law, but they have been the subject of debate throughout the legislative process and may be added in the future. These types of institutions may want to wait until the Treasury directly addresses the applicability of the Act to such funds before taking any steps to utilize this Act. In determining whether to purchase assets from, or insure assets of, a particular financial institution, the Secretary will consider a variety of factors, including the interests of taxpayers, minimizing the national debt, stability in the financial market and communities, the needs of the financial institutions, and the needs of local communities.5 Any financial institution selling assets pursuant to TARP (a “Selling Institution”) should focus on these

• factors. In particular, in a direct purchase, the Secretary will consider the long-term

viability of the Selling Institution.6 A Selling Institution should be prepared to demonstrate a history of good asset management and stable long-term planning and financial prospects in the event of the sale. Another characteristic the Secretary must consider is protecting retirement security.7 A Selling Institution making application should identify any eligible retirement plans it holds. In exercising its authority under the Act, with respect to financial institutions with assets of less than $1 billion that lost significant amounts of capital in the last quarter as a result of devaluation of preferred government-sponsored enterprise stock (such as Fannie Mae and Freddie Mac stock), the Secretary must consider whether that financial institution can be restored to an adequately capitalized level.8 This consideration specifically references financial institutions that serve low- and moderate- income populations and other underserved communities. Therefore, a Selling Institution may want to provide financial statements and other documentation to evidence this capitalization issue and to highlight any underserved populations that it serves. Although foreign banks are not currently eligible to participate in the programs established in the Act, the Secretary is required to coordinate with foreign financial authorities and central banks to establish programs similar to TARP.9 This provides an

• pportunity for foreign banks to become involved in the discussions regarding such

5 Sec. 103 6 Sec. 103(4) 7 Sec. 103(8) 8 Sec. 103(6) 9 Sec. 112

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 9

• programs. In addition, by reviewing the effect of the existing TARP program on the US

financial institutions, foreign banks can be prepared to learn from previous mistakes and take advantage of the standards and trials completed in the first round. 2. What assets may be sold to the Secretary or guaranteed by the Secretary? The Secretary is authorized to buy or guarantee Troubled Assets which include “mortgages, and any securities, obligations or other instruments that are based on or related to such mortgages.”10 Both residential and commercial assets are included in the eligible assets.11 Therefore, the Secretary could potentially buy or insure loans secured by real estate of all types, including real estate used for business or residential purposes, vacant land, acquisition loans, and construction loans. The Troubled Assets must have been originated

• r issued on or before March 14, 2008.12 In addition, following consultation with the

Chairman of the Federal Reserve and written notification to Congress, the Secretary may purchase any other financial instrument if the Secretary determines the purchase is necessary to promote financial market stability.13 This expands the potential scope of assets that could be acquired in this program to a very wide range of instruments. The Secretary has broad discretion to determine what types of assets will be purchased. For an asset to be considered a “troubled asset”, the Secretary must determine that the purchase will promote financial market stability.14 An entity desiring to participate should demonstrate its role in the entire financial market and the stability that this particular sale will provide to its future operations. Regardless of the type of asset it is attempting to sell, if the financial institution can show that the sale will have a significant positive affect on the market, it may be able to convince the Secretary to purchase the asset. Financial institutions with non-performing assets that may qualify under the discretionary category (i.e., student loans, car loans and other securities or loans that were provided on terms that are no longer marketable) should not be discouraged from entering into discussions with the Secretary because no timing requirement is set forth in the Act that would delay the Secretary’s ability to purchase additional types of instruments. The TARP program guidelines to be established by the Secretary upon the first purchase of Troubled Assets or by November 17, 2008, will include criteria for identifying Troubled Assets to purchase.15 The Act itself sets forth certain factors that the Secretary will consider (and the prospective Selling Institution should highlight) in selecting assets to purchase, including:16 (a) minimizing long term negative impact on taxpayers; (b) direct outlays; (c) potential long-term returns on assets purchased; (d) overall economic benefits due to

10 Sec. 101(a)(1); 102(a)(1); 3(9)(A) 11 Sec. 3(9) 12 Sec. 3 (9)(A); 102(a)(1) 13 Sec. 3(9)(B) 14 Sec. 3(9)(A) 15 Sec. 101(d) 16 Sec. 113(a)(1)

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 10

| Lenders that are considering participating in TARP or the insurance program should address foreclosure of non-performing loans because the secretary can only purchase instruments, not the actual real estate. |

improvements in economic activity and availability of credit; (e) impact on the savings and pensions of individuals; and (f) reduction in losses to the Federal Government. Because the focus of the current financial crisis is on subprime loans and a steady decline in the value of homes, the Secretary will likely initially focus on Troubled Assets that include residential mortgages and mortgage-backed securities. The Act is unclear in how it applies to certain categories of assets. For example, the Secretary would probably not elect to buy a lender’s participation interest in a loan even if such interest is in a Troubled Asset because the lender only has a contractual relationship with the original lender rather than a lender-borrower relationship with the borrower. However, participant lenders may still benefit if the Secretary purchases the entire loan from the original lender and thereby assumes all of the obligations of the lender to the

• participant. In addition, while notes in favor of syndicated lenders should qualify as

Troubled Assets because the lender has a lender-borrower relationship and is secured by the mortgage in favor of the collateral agent, they will not likely be purchased by the Secretary because the Secretary would only obtain partial control and would not be able to modify the loan going forward. Troubled lenders that are part of a syndicated group would likely want to begin discussions with the other lenders so that they could transfer to the Secretary sufficient interest in the loan that the Secretary would gain control and deem it a productive purchase. By definition, the assets that are eligible to be purchased only include instruments, and not any actual real estate owned by financial institutions as a result of foreclosures. The Secretary does have authority to consider purchasing “other real estate owned and instruments backed by mortgages on multi-family properties.”17 Accordingly, troubled lenders should address foreclosure of non-performing loans if they are considering pursuing TARP or the Insurance Program until the Secretary says

• therwise.

3. What are the procedures for entering into sales? The program guidelines to be established by the Secretary will include the mechanism for purchasing the assets and methods for pricing and valuation.18 The Secretary may purchase assets through direct purchases, auctions, and reverse auctions.19 The Secretary will establish “vehicles” that purchase, hold and sell Troubled Assets and issue obligations, and therefore, the exact mechanics are uncertain until such “vehicles” are in place.20

17 Sec. 103(9) 18 Sec. 101(d) 19 Sec. 113(b) and (c) 20 Sec. 101(c)(4)

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 11

4. How will the Secretary value the Troubled Assets it decides to purchase? The Act does not provide any precise details for how the Secretary will determine the price it pays for the Troubled Assets. The program guidelines to be established by the Secretary will include methods for pricing and valuation.21 There are three general requirements that currently govern the Secretary’s valuation process: a. The Act requires the Secretary to purchase the assets at the lowest price consistent with the purpose of the Act.22 b. The Secretary is required to take steps to prevent unjust enrichment of financial institutions that utilize this program and therefore may not purchase Troubled Assets for a higher price than the financial institution paid when it purchased the asset.23 c. The Act also requires the Secretary to control its expenditures by using market mechanisms such as auctions or reverse auctions. 24 The guideline set forth in the subsection b. above is not applicable if the institution purchased the Troubled Asset as part of a merger or acquisition, or from a financial institution in receivership or bankruptcy.25 Thus, institutions that have acquired failing banks in the recent months are still able to participate in the programs. Further, financial institutions that do not currently hold Troubled Assets may want to evaluate whether any benefits could accrue to their company and to the market as a result of their takeover of a failing institution given their ability to use TARP and the Insurance Program in the future. In any other case, Selling Institutions need to determine the price they originally paid for such assets and recognize that typically such price will be the ceiling in their negotiations with the Secretary. Despite the clear preference for the use of market mechanisms, if the Secretary determines that an auction or a reverse auction is not appropriate, then the Secretary may make direct purchases, provided it uses additional measures (none of which are described) to ensure that prices are reasonable and reflect the underlying value of the assets.26 Once the Secretary begins purchasing assets through TARP, Selling Institutions can look to prior sales to help determine the value of their assets. The Secretary, after purchasing,

21 Sec. 101(d) 22 Sec. 113(b) 23 Sec. 101(e) 24 Sec. 113(b) 25 Sec. 101(e) 26 Sec. 113(c)

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 12

trading or disposing of any Troubled Assets, must publish a description of the assets, amounts involved, and the valuation or pricing method used.27 By comparing their assets to the ones involved in prior transactions, Selling Institutions can estimate how much the Secretary will pay for their assets, or prepare an explanation of why their assets should be valued at a certain price. Pricing will be an important factor in the success of TARP. If the Secretary’s purchase price is too low (or even equal to the current market rate), then banks will not utilize the program because the sales will not strengthen their balance sheets. And if institutions are not using the program, or if the sales do not provide enough cash to improve the financial viability of the participating institutions, then TARP will have no significant benefit to the liquidity and stability of the overall market. By contrast, if the Secretary pays too high a price for the assets (or pays a price that is higher than market), then it may artificially inflate the values of those Troubled Assets. This would prolong the time it will take for the value of these assets to rise to market value. In addition, if the price is artificially high, then when it is time to sell those assets, the Secretary will likely only be able to sell at a loss and therefore would not be able to recoup the costs of taxpayers invested in the program. 5. What are the procedures for obtaining guarantees under the Insurance Program? Under the Insurance Program, the Secretary will guarantee the timely payment of up to 100% of the principal and interest on Troubled Assets of financial institutions (“Insuring Institutions”).28 The Secretary has the authority to determine the terms and conditions of the guarantees and such terms may be distinguished by category or class of asset.29 The Insuring Institutions must be prepared to pay risk-based premiums to the Secretary. 30 The particular terms and provisions and premiums for each category and risk level will be determined by the Secretary in the coming months. 6. How will the amount of the premium be determined? The Secretary has the discretion to determine the amount of premiums that each Insuring Institution must pay. The premiums must be sufficient to create reserves to pay claims under the guarantees.31 The premiums may be determined by category or class of Troubled Asset to be guaranteed and variations in rates may be based on the credit risk associated with the various Troubled Assets being insured, but the rates must be established through

27 Sec. 114 28 Sec. 102(a) 29 Sec. 102(a)(2) 30 Sec. 102(c)(1) 31 Sec. 102(c)

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 13

actuarial analysis and be set at a rate that will ensure protection of taxpayers.32 It does not appear that there will be much of an opportunity for Insuring Institutions to negotiate

• nce the premium amounts have been set for each class of Troubled Assets.

The amounts that will be required for different categories or classes of assets or types of credit risk have not been provided. Upon establishing a premium, the Secretary is required to publish the methodology it used for setting the premium for such class of Troubled Assets as well as the explanation of the appropriateness of such class of assets for participation in the Insurance Program.33 7. What are the downsides to utilizing TARP to sell Troubled Assets to the Secretary? Institutions that participate in this program subject themselves to additional requirements and limitations, including but not limited to issuance of Upside Participations (as defined below), executive compensation restrictions, and disclosure obligations. While many Selling Institutions may find the required grant of Upside Participations and compliance with the executive compensation restrictions uncomfortable, it is doubtful that these requirements will discourage an Institution from participating in TARP. Selling Institutions subject themselves to additional disclosures. In connection with a purchase, the Secretary must look at whether the Selling Institution’s public disclosure with respect to sources of exposure and risks is sufficient to provide adequate information to the public of the financial condition of the Selling Institution.34 If the disclosure is not adequate, the Secretary will make recommendations to the federal regulatory authorities. Additional disclosure requirements could subject to the Selling Institutions to various claims related to inadequate disclosures. In addition, the disclosure of the types, amounts and pricing of assets may provide sufficient information to permit the public to determine which financial institution is participating in the program. This could have a negative marketing effect on the Selling Institution if participation in the program is associated with financial instability. 8. Will Selling Institutions have any recourse against the Secretary? Selling Institutions will not be allowed to bring an action or claim against the Secretary with respect to its participation in any program under the Act unless the written contract with the Secretary expressly grants that right.35 Thus, Selling Institutions should take care to provide adequate remedies in any purchase contract with the Secretary.

32 Sec. 102(a)(2), (c)(2) and (c)(3) 33 Sec. 102(c)(2) 34 Sec. 114(b) 35 Sec. 119(a)

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 14

| The Upside Participations required by the Act are included to protect the

• taxpayer. |

9. What will be the terms of the Upside Participations? Selling Institutions which have a significant level of participation, must the ability to participate in the appreciation of the value of such Selling Institutions through the issuance of warrants or senior debt, depending upon the character of the Selling Institution (“Upside Participation”). By providing the ability to participate in the appreciation of the value of the Selling Institution, these instruments should provide additional protection against losses and cover the administrative costs of TARP. The Act requires that the Upside Participations, depending on the type of Upside Participation issued, provide for reasonable participation from the Secretary in equity upside or, in the case of debt, a reasonable interest rate premium. Warrants issued must include customary anti-dilution provisions and include provisions that protect the Secretary if the underlying stock is no longer listed on a US stock exchange, such as provisions allowing for the conversion of the warrant to senior debt or other provisions that the Secretary deems appropriate to protect the value of the interest. The Secretary has broad discretion in the administration of this provision regarding Upside Participation, which leaves certain questions unanswered. The Secretary is charged with setting the exercise price and other economic terms. We will continue to pay attention to the Treasury’s acts, reports, and published guidelines in the coming months to determine how onerous these terms might be. 10. Should a Financial Institution Sell or Insure Troubled Assets? Financial Institutions will be faced with a decision whether to sell their Troubled Assets under TARP, and subject themselves to the additional restrictions and requirements, or to insure their Troubled Assets under the Insurance Program, and pay a premium. Each individual institution will have to consider the costs of the Upside Participations and the repercussions of the executive compensation restrictions and compare it to the costs of the premiums for the particular asset class it is holding. 11. How might the Federal Property Managers’ ability to “encourage” modification of loans affect a financial institution? The Act requires the Federal Property Managers who own Troubled Assets to implement a plan to maximize homeowner assistance and encourage mortgage servicers to take advantage of foreclosure mitigation programs such as the HOPE program.36 This plan may include reducing interest rates, reducing loan principal and other similar mortgage

36 Sec. 110(b)(1)

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 15

modifications.37 The Act also requires the Federal Property Managers who hold interests in

• bligations or pools of obligations secured by residential mortgages to encourage

mortgage servicers to modify the underlying residential mortgages.38 The latter of these two requirements poses potentially serious contractual impairment issues for financial institutions who continue to hold interests in these troubled loans. In effect, the Act authorizes mortgage servicers to change the terms of contracts previously entered by financial institutions and homeowners without consent from financial institutions. Financial institutions and purchasers of mortgage-backed securities relied on the income stream from these mortgages when they originated or acquired the mortgages as the case may be. B. Considerations and Opportunities for Entities that do not Qualify as “Financial Institutions” or do not have Troubled Assets to Sell 1. Effect

• f

Secretary’s Valuation and Pricing

• f

Troubled Assets Troubled Assets are the target of this program partially because there is no current market price available for these assets. When the Secretary purchases Troubled Assets it is required to publish the purchase prices along with other terms and the descriptions of the Troubled

• Assets. 39 As a result, the price set by the

Secretary for a certain class of asset may become the market price for those types of assets even outside TARP program. The valuation decisions made by the Secretary and agreed to by the Selling Institutions will have a major influence on valuation of mortgage assets throughout the US financial market. 2. Employment and Contracting Opportunities There are a number of new positions that will be created within the federal government in connection with the administration of the Act. The Secretary has authority to directly hire employees to administer the Act and to contract with outside consultants, companies or individuals who will be needed to handle the volume of work and technical decisions that are required under the Act. For example, the Secretary will likely need to hire significant numbers of people to handle the intake of mortgage modification requests, to review such requests and to make determinations, on the Secretary’s behalf, as to the appropriate loss mitigation measure, if any, the Secretary should permit. In addition, the Federal Property Managers will need to add sufficient capacity to be able to manage recurring reporting

• requirements. Therefore, individuals who have been laid off from financial institutions or

related companies as part of extensive job cuts and increasing unemployment, may be able to put their skills to work in implementing the Act.

37 Sec. 110(b)(2) 38 Sec. 110(c) 39 Sec. 114(a)

| The pricing of Troubled Assets will have an important impact on all financial institutions, even those that do not participate in TARP. |

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 16

The following are some potential opportunities for third parties to work with the government in implementing this Act:

• The Secretary can designate financial institutions as financial agents of the Federal

Government who will perform duties related to the Act;40 companies that provide market research, financial analysis, accounting and auditing services may be hired to assist the various departments with the reporting requirements mandated by the Act; and there may be opportunities for companies to participate in management of Troubled Assets purchased by the Secretary including property managers, loan servicers and other service providers. 41 The guidelines to be published by the Secretary will establish procedures for selecting asset managers.42 3. Streamlined Contracting Procedures The Act provides a streamlined process for the Secretary to enter into contracts with third party contractors and consultants for the purpose of implementing the Act.43 The Secretary may waive specific provisions of the Federal Acquisition Regulation (“FAR”), the cumbersome process by which the federal government contracts for goods and services, upon a determination that urgent and compelling circumstances make compliance contrary to the public interest.44 Where the Secretary has waived any provision of the FAR pertaining to minority contracting then, to the maximum extent practicable, the Secretary must develop and implement standards and procedures to ensure the inclusion of minorities in the applicable solicitation or contract.45 4. Conflicts of Interest As soon as practicable, the Secretary must issue regulations or guidelines to address, manage or prohibit conflicts of interest that may arise in the administration of the Act, including those arising from the hiring of contractors, advisors and asset managers, the purchase and management of Troubled Assets, post-employment restrictions on employees and any other potential conflict of interest the Secretary deems necessary or appropriate in the public interest.46 5. Opportunities to Purchase Assets Any entity, even those that are not eligible to sell or obtain insurance on assets under the Act, may still benefit from the Secretary’s purchases of Troubled Assets. The Secretary is authorized to sell Troubled Assets it purchases under TARP.47 It will hold assets until

40 Sec. 101(c)(3) 41 Sec. 106 42 Sec. 101(d) 43 Sec. 107(a) 44 Sec. 107(a) 45 Sec. 107(b) 46 Sec. 108(a) and (b) 47 Sec. 106

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 17

maturity unless it determines selling them beforehand maximizes value to taxpayers. In addition to maximizing value to the taxpayers, the only other guidance for pricing of the assets to be sold by the Secretary is that the assets should be sold at a price the Secretary determines will maximize the taxpayers’ return on investment.48 In addition, entities could purchase from the Secretary senior debt or warrant rights in the Selling Institutions from the Secretary.49 This provides an opportunity for non-financial sector companies to invest in the financial sector and to obtain a return if the market improves. 6. What Obligations Might be Imposed on Financial Institutions if the President makes a Proposal to Recoup any Shortfall in TARP from the Financial Industry? The broad recoupment mandate, coupled with the amorphous designation of its target, has the potential to cast a wide net and impose a severe impact upon a broad segment of the economy, perhaps at the very time when the “financial industry” is in the process of recovery. II. BENCHMARK DATES FOR FURTHER POLICY AND AMENDMENTS Carlton Fields will monitor additional actions to be taken by the various administrative bodies under the Act and will provide updates regarding the same. Some of the key dates and actions that we will be monitoring are set forth below: November17, 2008 The Secretary is required to publish program guidelines before the earlier of (a) 2 business days after the date of the first purchase of Troubled Assets under TARP or (b) 45 days after the enactment of the Act.50 December 2, 2008 Each Federal Property Manager is required to develop and begin implementation of the plan to maximize assistance to homeowners

48 Sec. 113(a)(2) 49 Sec. 113(d) 50 Sec. 101(d)

| It is unclear how the recoupment mandate would be accomplished, and it is equally unclear who would be impacted. The term “financial industry” is not defined in the Act, but it seems clear that the exaction required to satisfy the recoupment mandate would not be confined to the financial institutions which participated in TARP. |

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 18

and encourage mortgage servicers to take advantage of foreclosure mitigation programs such as the HOPE program no later than this

• date. 51

Each Federal Property Manager is required to report to Congress “specific information on the number and types of loan modifications made and the number of actual foreclosures occurring during the reporting period” on this date.52 The Secretary must issue guidance on the types and methods of payments that would constitute a “golden parachute” by this date.53 January 1, 2009 The Secretary must report to Congress on the Insurance Program.54 January 20, 2009 The Oversight Panel must submit a special report on regulatory reform (the “Special Report”) to Congress by this date.55 The Special Report is to include an analysis of the effectiveness of the regulatory system in its current state, and will provide recommendations for improvement, including regarding whether any currently unregulated participants in the financial system should be subject to regulation, and whether existing consumer protections are adequate.56 Carlton Fields will closely monitor this special report, as it will likely provide the blueprint for the regulatory regime to be pursued by the next administration and the next Congress. April 30, 2009 No later than this date, the Secretary must submit a Regulatory Modernization Report to Congress which analyzes the current state

• f the financial markets and financial regulation, and which provides

recommendations for improvement, including whether currently unregulated financial market participants should be subject to regulation.57 Carlton Fields will monitor the Secretary’s report, as it will likely play a significant role in the shape of future regulation of the financial markets. In addition, by this date, the SEC is to conduct a study on market to market standards. June 1, 2009 No later than this date, the Comptroller must issue a Study and Report on Margin Authority to Congress analyzing the role that leveraging and sudden deleveraging of financial institutions played in the current financial crisis, the roles and responsibilities of the Board, the SEC, the Secretary and other Federal banking agencies

51 Sec. 110(b)(4) 52 Sec. 110(b)(5) 53 Sec. 111(c) 54 Sec. 102(b) 55 Sec. 125(b) 56 Sec. 125(b) 57 Sec. 105(c)

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 19

with respect to monitoring and acting to curtail excessive leveraging, and the authority of the Board of Governors of the Federal Reserve System to regulate leverage. 58 Carlton Fields will monitor the Comptroller’s study and report to Congress, as they will likely become the framework for future regulation pursued by the next Congress and the next administration. In addition, by this date, the Treasury is to promulgate executive compensation rules governing financial institutions that sell assets to the government. Periodic Reporting In addition, there are a multitude of periodic reports required under the Act which could provide valuable information and have important impacts on the market as well. These reports include, but are not limited to: 1. Within 60 days after first exercise of authority to purchase assets under TARP or first exercise of authority under the Insurance Program, the Secretary must report to Congress an overview of the actual obligations and expenditures, expected expenditures, and detailed financial statements. The Secretary must make similar reports to Congress every month thereafter. 2. No later than seven days after each $50,000,000.00 increment

• f commitments to purchase Troubled Assets is reached, the

Secretary must submit a report to Congress which describes all transactions made during the reporting period, including a justification of the pricing and terms, as well as a description of the impact of such transactions on the financial system and an estimate of additional actions that may be required. 3. Beginning January 1, 2009, each Federal Property Manager is required every 30 days to report to Congress “specific information on the number and types of loan modifications made and the number of actual foreclosures occurring during the reporting period”. 4. The Financial Stability Oversight Board must report its findings to Congress and the Congressional Oversight Panel at least quarterly. 5. The Special Inspector General for TARP is required to submit quarterly reports to Congress summarizing his or her findings. 6. The Congressional Oversight Panel must submit monthly reports to Congress addressing the effectiveness of the Act.

58 Sec. 117

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 20

7. The Comptroller General must report to Congress and to the Special Inspector General for TARP at least once every 60 days. Additionally, the Comptroller General must audit the annual financial statements which are required under the Act. The Federal Reserve is required to report to Congress on use of its emergency lending authority under Section 13(3) of Federal Reserve Act. III. BRIEF SUMMARY OF ACT A. Troubled Asset Relief Program The Act authorizes the Secretary to establish TARP, under which the Secretary could use up to $700 billion to buy Troubled Assets from financial institutions on terms and conditions determined by the Secretary.59 The Secretary’s authority to purchase is initially limited to $250 billion. However, the amount available to the Secretary may be increased to $350 billion if the President submits a written certification of the Secretary’s need, and to $700 billion if the President submits a detailed plan and Congress does not respond with a joint resolution disapproving of such plan.60 The Secretary’s authority to buy such assets under TARP expires on December 31, 2009 unless the Secretary submits a written certification to Congress to extend the authority to not later than October 2, 2010.61 B. Troubled Asset Insurance Program If the Secretary elects to establish TARP, it must also establish the Insurance Program that will guarantee the payments on Troubled Assets of financial institutions. 62 Insuring Institutions must pay premiums to be established by the Secretary, which premiums will be used to pay claims on the guarantees.63 C. Upside Participation Requirement A stated goal of the Act is minimization of a potential negative impact on the taxpayer and maximization of the benefits for taxpayers. 64 Accordingly, the Act requires Selling Institutions, which sell in excess of $100 million of Troubled Assets,65 to provide taxpayers with the ability to participate in the appreciation of the value of such Selling Institutions through the issuance of warrants or senior debt to the Treasury. While it is intended that taxpayers, through their role as market participants, will benefit from the Secretary’s

59 Sec. 101(a); 115 60 Sec. 115 61 Sec. 120 62 Sec. 102(a) 63 Sec. 102(c) 64 Sec. 113(a)(1) 65 Sec. 113(d)(3)

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 21

purchase and sale of the Troubled Assets, the Upside Participation provisions are another avenue by which taxpayers can benefit. The Act distinguishes between publicly-listed and non-publicly listed companies.66 If the Selling Institution is listed on a US stock exchange, then the Secretary must receive a warrant granting the Secretary the right to receive nonvoting common or preferred stock in the Selling Institution or voting stock with respect to which the Secretary agrees not to exercise the requisite voting powers.67 If the Selling Institution is not listed on a US stock exchange, the Secretary may obtain a warrant for common or preferred stock of the Selling Institution or a senior debt instrument.68 Also, if a Selling Institution does not have the authorized shares of nonvoting stock available to satisfy such warrant, the Secretary may accept senior debt with equivalent value.69 As discussed above, the Act does provide a general framework for the terms that must be included in the instrument representing an Upside Participation.70 D. Executive Compensation Restrictions Any financial institution selling Troubled Assets to the Secretary will be subject to executive compensation requirements. These requirements differ depending upon whether the Troubled Assets are part of a direct sale to the Secretary or whether they are part of an auction purchase by the Secretary for an amount in excess of $300 million. 1. Direct Purchases Where the Treasury takes a “meaningful debt or equity position in [the] financial institution as part of a transaction” as part of a purchase of a financial institution’s Troubled Assets, “the Secretary shall require that the Selling Institution meet appropriate standards for executive compensation and corporate governance.”71 The Act never defines what a “meaningful” position would be in a Selling Institution; however, to the extent that an institution is forced to sell as a last resort to avoid failure or bankruptcy, it is reasonable to assume that any position the Treasury would take in the institution would be meaningful. Such Selling Institution would be required to abide by the following executive compensation standards: limit the compensation incentives for senior executive officers to take “unnecessary and excessive” risks which might threaten the value of the institution – while not defined, “unnecessarily and excessive” will likely be include bonuses that are heavily performance laden;72

66 Sec. 113(d)(1) 67 Sec. 113(d)(1)(A) 68 Sec. 113(d)(1)(B) 69 Sec. 113(d)(2)(F) 70 Sec. 113(d)(2) 71 Sec. 111(b)(1) 72 Sec. 111(b)(2)(A)

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 22

prohibit any golden parachute payment for a senior executive officer;73 and provide a clawback provision for the institution of a senior executive officer’s bonus where such bonus is based upon company financial statements which are later proven to be materially inaccurate.74 The Act defines a senior executive officer for any Selling Institution which sells directly to the Treasury as its CEO, CFO and three other most highly compensated executive officers as defined by the Securities Exchange Act of 1934 whether or not the Selling Institution is publicly traded.75 Thus, these compensation restrictions will also apply to any wholly or partially owned subsidiary of a publicly traded company as well as all other private

• companies. The first and second restrictions listed above would apply for the period in

which the Treasury holds any position in an institution, while the third provision would appear to apply for an indefinite period regardless of whether the Treasury holds any position.76 The Act is silent as to the new corporate governance standards which would be imposed upon Selling Institutions. It is likely, however, that at the very least, Sarbanes-Oxley standards would be placed on any privately-held institution in which the Treasury takes a meaningful position. 2. Auction Sales Any Selling Institution that sells in the aggregate of an excess of $300 million in Troubled Assets in one or more auctions or in a combination of auctions and direct sales will be subject to the following executive compensation restrictions: the institution will be subject to an amended Section 162(m) of the Internal Revenue Code which would impose a $500,000 limitation on the amount of compensation which can be deducted for each of the top five senior executive officers with such

• fficers being determined by the regulations promulgated under the Securities Exchange

Act of 1934 regardless of whether the institution is public;77 the amended 162(m) to which the institution will be subject will no longer contain an exception for “performance based compensation;” the present allowance under 162(m) for a company to defer non-deductible compensation for executives into future years would no longer be allowed;78

73 Sec. 111(b)(2)(C) 74 Sec. 111(b)(2)(B) 75 Sec. 111(b)(3) 76 Sec. 111(b)(1) 77 Sec. 302(a)(i) 78 Sec. 302(a)(ii)

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 23

the top five senior executive officers’ severance payments in the event of involuntary termination due to the bankruptcy, liquidation or receivership of the financial institution will be subject to Code Section 280G’s rules regarding golden parachutes which can result in the loss of any deduction for the institution and a twenty percent excise tax on the executive officer taking the severance;79 and the institution will also be prohibited from entering into any employment contract that provides a golden parachute to a senior executive officer in the event of involuntary termination due to the bankruptcy, liquidation or receivership of the financial institution.80 The Secretary is charged with providing guidance on this last bullet point on the types and methods of payments that would constitute a “golden parachute.” This guidance must be issued by December 2, 2008.81 E. Administration and Oversight of Programs 1. Administration; Independent Oversight. The Act establishes the Office of Financial Stability (“OFS”) within the Office of Domestic Finance of the Department of the Treasury to implement TARP.82 The OFS will be headed by an Assistant Secretary of the Treasury, to be appointed by the President and confirmed by the Senate. 83 The Act provides for four independent entities, the Financial Stability Oversight Board, the Government Accountability Office, the Office of the Special Inspector General for the Troubled Asset Relief Program, and the Congressional Oversight Panel, to

• versee and monitor the operation of the programs authorized by the Act.

2. Judicial Review The Secretary’s actions under the Act will be reviewable under the judicial review provisions of the Administrative Procedures Act,84 and such actions will be set aside if they are determined to be arbitrary, capricious, an abuse of discretion or not in accordance with law.85 The Act provides that except in the event of a constitutional challenge, no injunction or other equitable relief shall be issued with respect to the Secretary’s purchase

• f Troubled Assets, implementation of the Insurance Program, management and sale of

Troubled Assets or implementation of the foreclosure mitigation programs.86 Additionally,

79 Sec. 302(b) 80 Sec. 111(c) 81 Sec. 111(c) 82 Sec. 101(a)(3)(A) 83 Sec. 101(a)(3)(A) 84 5 U.S.C. Pt. I, Ch. 7 85 Sec. 119(a)(1) 86 Sec. 119(a)(2)(A)

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 24

the Act prohibits Selling Institutions from bringing any action or claim against the Secretary, except in the event of a constitutional claim, or unless such action or claim is expressly permitted by a written contract with the Secretary. F. Homeowner Relief Despite being commonly referred to as a bailout for Wall Street, the Act is also a rescue for “Main Street,” particularly homeowners facing foreclosure. Three provisions of the Act confirm the government’s aggressive stance to minimize homeowner foreclosures, namely section 109 (Foreclosure Mitigation Efforts), section 110 (Assistance to Homeowners) and section 124 (HOPE for Homeowners Amendments). Each is discussed, in turn, below. 1. Foreclosure Mitigation Efforts The Act requires the Secretary to implement a plan (with respect to the mortgages, mortgage backed securities and other Troubled Assets secured by residential real estate acquired under TARP) to maximize assistance for homeowners and encourage mortgage servicers to take advantage of all available programs to minimize foreclosures, including the HOPE program (mentioned below).87 Upon receiving a reasonable request to modify an existing investment contract, the Secretary can consent to any residential mortgage modification “where appropriate.”88 It is unclear whether the Secretary can deem a mortgage modification appropriate in his sole and absolute discretion. The Secretary must also consider net present value to the taxpayer when consenting to a modification.89 The following loss mitigation measures are at the Secretary’s disposal: term extensions, rate reductions, principal write downs, increases in the proportion of loans within a trust or other structure allowed to be modified,

• r removal of other limitation on modifications.90 The Act requires Secretary approval on

every mortgage modification. The Secretary should be able to modify residential mortgages that the Treasury has acquired complete ownership of under TARP. The Secretary may have more difficulty, however, modifying residential mortgages underlying mortgage-backed securities whose tranches are held, in part, by entities other than the Treasury. The Act attempts to resolve this issue by requiring the Secretary to coordinate with

• ther

federal agencies and entities to identify opportunities for the Treasury to acquire the remaining tranches necessary to modify the residential mortgages underlying these mortgage-backed securities.91

87 Sec. 109(a) 88 Sec. 109(c) 89 Sec. 109(c) 90 Sec. 109(c) 91 Sec. 109(b)

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 25

2. Assistance to Homeowners The Act also requires the Federal Housing Finance Agency, the FDIC and the Federal Reserve (collectively, the “Federal Property Managers”) to implement a similar plan as required of the Secretary in the preceding section.92 The Federal Property Managers hold mortgages and mortgage-backed assets as a result of the takeover of financial institutions such as Fannie Mae and Freddie Mac, holdings pursuant to the Federal Deposit Insurance Act and open-market operations. 93 The Federal Property Managers may enter into residential mortgage modifications for reductions in interest rates, reductions in loan principal and other similar modifications.94 Lastly, the Act requires the Federal Property Managers who hold interests in obligations or pools of obligations secured by residential mortgages to encourage mortgage servicers to modify the underlying residential mortgages and assist in facilitating such modifications in

• rder to implement the homeowner assistance plan.95

3. HOPE for Homeowners Amendments The HOPE for Homeowners (“HOPE”) program is an FHA administered program that was enacted on July 30, 2008 to help homeowners avoid foreclosure.96 The HOPE program allows struggling borrowers, many of whom have adjustable-rate mortgages, to refinance into more affordable, fixed-rate, FHA-insured mortgages.97 Despite its infancy (the HOPE program was launched on October 1), critics have argued that the HOPE program is ineffective because it is voluntary and not appealing to mortgage lenders who are required to take a loss on the difference between the existing

• bligations and the new loan, which is set at 90% of current appraised value.98 The Act

attempts to increase lender participation in the HOPE program by giving the Federal Reserve the discretion to lower the required write-down of mortgage principal.99 Finally, pursuant to the requirement that all subordinate lien holders must agree to extinguish their liens as a condition to a refinancing under the HOPE program, and as an enticement for them to do so, the Act now permits the FHA to negotiate with subordinate lien holders.100 The FHA may either share its interest in the future appreciation of the mortgaged property with subordinate lien holders (the only option under the

92 Sec. 110(b)(1) 93 Sec. 110(a)(1)(A), (B) and (C) 94 Sec. 110(b)(2) 95 Sec. 110(c) 96 U.S.C. § 1715z-23 97 U.S.C. § 1715z-23(b) 98 U.S.C. § 1715z-23(e)(2)(B) 99 Sec. 124(1)(B) 100 Sec. 124(1)(C)(ii)

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 OCTOBER 2008 26

HOPE program as originally enacted) or make a payment to subordinate lien holders in lieu of such sharing arrangement.101 G. Recoupment Upon the five year anniversary of the passage of the Act (October 3, 2013), the Director

• f the Office of Management and Budget, in consultation with the Director of the

Congressional Budget Office, will submit a report to Congress which will set forth the net balance of funds within TARP. In the event of a shortfall, the President shall submit a legislative proposal that “recoups from the financial industry an amount equal to the shortfall in order to ensure that [TARP] does not add to the deficit or national debt.” 102 H. Changes to FDIC and Federal Reserve Authority As a means of preventing the flight of deposits from financial institutions, for the period commencing on October 3, 2008 and ending on December 31, 2008, the Act temporarily increases the maximum amount of federal deposit insurance from $100,000 to $250,000.103 I. Exchange Stabilization Fund Reimbursement These measures are aimed at preventing capital flight from money market mutual funds, a principal source of financing for financial institutions and the capital markets. The Act expressly prohibits the Secretary from using the Stabilization Fund for any future guaranty programs for the United States money market mutual funds industry.104 In conclusion, we can say that the Act is in flux, leaves much to be answered and is not yet a conclusive policy for final analysis or direction. We will continue to review, analyze and update.

101 Sec. 124(1)(C)(ii) 102 Sec. 134 103 Sec. 136(a)(1) 104 Sec. 131(b)

| The Act requires the Secretary to use funds authorized under the Act to reimburse the Exchange Stabilization Fund (an emergency reserve fund of the Treasury), for any amounts which are used by the Treasury Money Market Funds Guaranty Program. |