Richard's Real Estate Thoughts

This morning after midnight the final details of the bailout plan were reached. The bill goes to the House today for a vote. The Senate is expected to vote by Wednesday. The plan follows the basic outline of the initial Treasury proposal presented to key lawmakers September 18. It calls for $700 billion from the US Treasury to be used to purchase mortgage securities.

Largest government intervention since Great Depression, action taken because of concerns resulting from bank to bank short term lending freeze that occurred two weeks ago. Several national central banks coordinated efforts to put $180 billion into the markets as an emergency measure to restore confidence and liquidity.

• Two part enactment of $250 billion
• Additional $100 billioin upon presidential certification of need
• $350 billion subject to congressional review
• Limits on executive compensation, including repaid bonuses if promised gains are not achieved
• Encourage loan modifications by lenders
• Agreement to share spending controls between congress and administration 
• President to report to Congress after 5 years the plan to recoup any taxpayer loss
• Provision for lenders to purchase government insurance as a credit enhancement, rather than sell the mortgage security

The initial proposal from the Treasury was 3 pages. The final bill submitted to Congress for vote is 110 pages long. The initial proposal was believed to be too vague on details and to provide the Treasury too much power.

Changes were proposed to spend the requested $700 billion incrementally, to limit executive pay, to provide foreclosure relief for families, to provide some protection for tax payer protections.

Each of these concerns were addressed in the final version to some degree.

I have not read details on how the purchases are to be made. There are mentions of a reverse auction. I have not heard if whole mortgage security pools will be bid or if the pools will be split up to isolate delinquent loans.

A concern of mine is whether the mortgages will be purchased at a discount or a premium. I have not heard much about that issue. My hope is that the government can turn these mortgage securities into a profit on the resales.

The final version does not seem to have any provision for the government to obtain equity positions in the lenders who participate in the rescue plan.

Speaker Nancy Pelosi is quoted, "This isn't about a bailout of Wall Street, it's a buy-in, so that we can turn our economy around."

This could be correct if issues that caused the crisis are addressed. Mortgages must be modified so homeowners can retain ownership. 

Foreclosures are at the core of the credit crisis. Banks dealing with the burden of nonperforming assets. Securities with undetermined value. Increasing existing home inventory. Downward pressure of home values. Neighborhoods with large percentage of vacant homes. And families devastated by the loss of the financial security of owning their home. 

The government must be able to sell back the securities, at a profit. And there needs to be some return to Glass- Steagall type of banking regulation. It is possible that in the aftermath of this lengthy credit crisis, regulation will go too far in correcting the mistakes made in the last 10 years.

Richard Smith
American Acceptance Mortgage, Inc
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