The surge in Iraq has been credited with turning the tide in that war. This bold plan to invest up to $700 billion to purchase mortgage securities seems to take a similar approach against the growing crisis in the mortgage and financial markets.
Last week the global economy came near a complete standstill, with banks refusing to provide short term loans to each other, choosing instead to hold on to whatever liquid assets they had. The world central banks, except for Russia, came together in a cooperative effort to pump billions of dollars into the world financial system to restore liquidity.
Thursday the US Treasury Department announced plans to get ahead of the problem. They would purchase defaulted mortgages, up to $700 billion worth.
Banks will sell non performing assets to the Treasury throught a reverse auction. The bank accepting the lowest price gets the sale.
- Selling these assets restores needed cash to the bank.
- Owning these discounted assets enables the Treasury, or its newly established asset management agency, to negotiate affordable modification.
- Homeowners with restored ability to make mortgage payments will keep their homes
- Foreclosures will stop the recent growth
- Home inventory will begin to slacken
- Housing price decline will hopefully turn
The actual cost of this program is yet to be known. The Treasury will be purchasing assets that have some value. If the program works and home prices will stabilize, the performing modified mortgages will be sold back to the mortgage markets. The actual cost of the program can be minimized.
This is a workable solution. There is a chance that, as Congress debates the plan this week, attempts will be made to add on additional pieces of legislation. Congress needs to fight this temptation, and pass this simple legislation, with minimal amendment, and with no unrelated amendment.
Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.
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FHA, VA, Rural Development, Reverse Mortgages, Construction Permanent, Renovation, FHA Renovation
Mortgage lending offices located in Chattanooga, TN
rsmith@aamonline.com
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Richard Smith Conventional, FHA, FHA 203k, HUD $100 down purchases, VA, Jumbo VA, Rural Development, Jumbo, FannieMae Homepath, Home Equity Line of Credit (HELOC). |
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Richard,
Thanks for the post. Taking the time to sort through the new financial landscape and provide for an overview is greatly appreciated.
Richard,
Thanks for the post. Taking the time to sort through the new financial landscape and provide for an overview is greatly appreciated.
Thanks William.
do you think this debate will preempt any work on the less pressing, but nonetheless vitally important down payment assistance bill.
Richard
Nice job with incorporating video into your posts! I'm still working on a few myself.
Tracy,
Your virtual tours are excellent. Videos are evidently the next thing. I started with some a few weeks ago, but started working on other web techniques.
I hope to use video regularly. This week I started facebook, twitter, and a new local blog on blogger.
Richard
It is true that nobody can really see what will happen if nothing is done. But the warning is that this is different than recessions that we've been through before. It's not just the small businesses and small banks that are going under because of hard times - it is starting at the other end. Huge, Nation wide and world wide companies are going under. This will quickly spiral out of control and reach down to every small business and every American household. Yes, wall street made A LOT of bad moves and things have to change and those responsible need to be help accountable, but that is not the immediate issue. The immediate issue is are we going to continue to allow massive companies to fail and watch our economy go with them? We may be literally talking about a total collapse, but who knows, maybe it won't be that bad - do we want to risk it? Plus, the government is NOT handing out money. You see savvy investors make similar moves all the time (granted not to same degree but the same principle) - Buy ASSETS from a distressed company and sell them off at a later time. This may be a money maker for the tax payer. Again we don't know the future we don't know if it will make money or loose money but it is an INVESTMENT of $700 billion, not a handout of $700 billion. The assets will always have some value to be sold later and, at worst, recoup some of the money if not break even and maybe even make money. The government will not be controlling companies it buys assets from. It will just own the assets that it bought and will only control the assets - NOT the companies.
To illustrate. Some of these assets are real estate (commercial and residential). Mr. Banker lends money to 5 people to buy homes. They were good safe loans. The people had down payment and great credit and work for big stable companies. Mr. Banker makes money from investing the borrowers monthly payments and creating wealth to lend more money. He also borrowers from other banks allowing him to lend to more borrowers. Suddenly, the big company in town goes out of business and 3 of his 5 borrowers are no longer able to pay their mortgage. He takes the houses back and lists them for sale. The houses are not selling because of such high unemployment. His liquidity to function and pay the daily bills has just dried up. Then a new borrower comes in the door and wants to buy a house. If Mr. Banker can lend him some money that will help with his own liquidity problems. He doesn't have any of his own money anymore so he goes to another bank for a loan like he has done many times before. He finds that they are having similar problems and they tell him they don't have the liquid money to help him out. So he has to tell his new borrower no. This borrower is well qualified and should be able to buy a home but the bank is not able to make the deal. Mr. Banker, that is in desperate need to do business, does not have the liquid funds to do so. People hear Mr. Banker is in trouble and they don't want their money with him anymore causing him to go out of business and leaving the town with no way of financing a car, a house, college, starting a business or anything.
Obviously this is simplified but take this situation and give the same problems to every bank in the country that just keeps seeing more and more big companies failing. What is going to happen to the banks and as a result to our economy? This proposal is for the government to step in and buy those houses that Mr. Banker has been trying to sell and then he can do more loans. Then the bank and the community can continue to function. This "bailout" is not to save those that caused the problem nor is it to take away their responsibility. Those are other issues that do need to be resolved. This is a call for swift action to put liquid funds in the market so free trade can continue to function.
Having said this, I hate the idea of government getting this involved. Government is usually not the answer and they usually make things worse but the alternative sounds even worse. I've heard the bailout compared to using radiation to treat cancer. It's going to be expensive, painful and cause a lot of damage. But what else should we do? Let the cancer run rampant?