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Obama’s Budget Puts Big Lenders on the Hook

President Barack Obama released his budget for fiscal year 2011 on Monday, and as expected, it includes a proposal for a hefty tax on big banks to recoup taxpayer dollars that the government shelled out to pull the financial system back from the brink of collapse.


The president's plans would impose a levy on all financial institutions with more than $50 billion in assets. The administration has calculated that fees taken from these banks would yield $9 billion a year over the next 10 years, and up to $117 billion within 12 years if necessary to ensure the full amount of Troubled Asset Relief Program (TARP) funds are recovered.

Obama has said he's become more determined to get back all of the taxpayers' money by ""reports of massive profits and obscene bonuses at the very firms who owe their continued existence to the American people,"" and he's laid the blame for the financial crisis squarely at the feet of large lenders because of the risk-taking culture that prevailed during the housing boom.

If approved by Congress, the levy would go into effect on June 30, 2010. The annual tax would be equal to 0.15 percent of a company's liabilities, excluding insured deposits and Tier 1 capital reserves.

The tax is a touchy subject for the big guys because many of the banks targeted for the new ""financial crisis responsibility fee"" have already repaid their capital injections from TARP, and some never even took the government hand-out. The Treasury said back in December that it expects to turn a $19 billion profit from its bailout investments in banks as a result of interest, dividends, and the sale of stock warrants.

In fact, a large share of the losses expected on TARP funding will come from automakers General Motors and Chrysler, but these manufacturers will not be required to pay Obama's special recouping fee.


Robert E. Story, Jr., chairman of the ""Mortgage Bankers Association"":http://www.mortgagebankers.org (MBA), issued the following statement regarding Obama's bank tax: ""Reducing the federal deficit is vital to the long-term health of the U.S. economy and our industry. However, we believe it can and should be done without negatively impacting the already-fragile housing market….[I]mposing additional taxes on lenders will only make economic recovery more difficult.""

MBA said it fears the financial crisis responsibility fee will discourage large financial institutions from entering into new, private label commercial mortgage backed securities (CMBS) and residential mortgage backed securities (RMBS) transactions and significantly reduce the profitability of non-agency servicing.

Treasury Secretary Timothy Geithner issued his own statement highlighting certain aspects of the president's budget related to the government's controversial financial bailout programs. Geithner noted that because of improved financial conditions, the projected cost of TARP has fallen from $341 billion to $117 billion, as reflected in the 2011 budget (and the figure on which Obama is basing his financial responsibility tax). The Treasury secretary also said that the additional $250 billion reserve that had been set aside in case the economy slipped and additional stabilization efforts were necessary has been removed.

According to Geithner, the Treasury is already taking steps to shift the focus of TARP to housing and small business. Going forward, he says the program will focus on the challenges of helping families avoid foreclosure and bringing down the high unemployment rate.

Other housing-related line items in the budget included a proposal to reduce itemized deductions, including the deduction of mortgage interest, for taxpayers reporting income above $250,000 for a couple or $200,000 for single filings. MBA argues that this would have a particularly negative impact in high-cost states like California and New York, as it would increase the cost of mortgages for potential homeowners in those areas.

The budget also incorporates a request by the ""Federal Housing Administration"":http://www.fha.gov (FHA) for congressional approval to raise its annual mortgage insurance premiums by 75 basis points â€" a move expected to help the agency replenish its depleted capital reserve fund. In addition it provides for an extra $18 million for FHA to implement new risk management procedures, $20 million to combat predatory lending and mortgage fraud at HUD, and additional funding for housing and foreclosure counseling.

One thing the president's budget did not include, although it was widely expected, was a blueprint â€" or at least an inkling of an indication â€" as to the administration's future plans for the government-backed mortgage financiers ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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