Has anyone really explained the government bailout to you? Me neither! Let me see if I got this right. I had to put this on paper to see where this is all going. The 700 Billion dollar bailout needs a more simple description to understand what the politicians do not want you to understand. Let's just say $700 Billion does not represent homes. It represents the bad home loans that have been securitized into paper instruments that are supposed to should like a good investment note. The problem is the cat is now out of the bag, and everyone knows they are not a good investment, in fact they are risk. That translates into institutions with bad paper that represents bad loans as hopelessly insolvent. No enters the government comes with a rescue plan.
Here is an overview. A 100% loan is made on a home that cost 250K. The home mortgage is sold to a new institution that turns it into a paper instrament. The note is packaged and sold off to a bank that can't get rid of it. Why? 6 months before the home was sold at 250K it was selling for 170K. There was a tremendous run up in appreciation due to the availability of 100% financing.
The buyer then walked away from the home and stopped making anymore payments because his payments were unaffordable. Perhaps it was because he did not read any of the documents at closing, and now it is societies problem. He then mails his keys back to the bank because his neighborhood has now declined in price to 190K...and the clock on the home value is still dropping. New buyers cannot obtain financing, and they cannot sell their smaller property to buy this one. Everyone is in hte same boat. Other neighbors are now in trouble also. So here is where the government plan kicks in.
The government buys these bad notes off the institutions for lets say 220K, and with the borrowed money (700 Billion) they exchange the bad debt from the bank to fresh new cash to infuse into the institutions. Now the government sits on this paper (and the homes that are represented by this bad paper until the market comes back. Hell starts to freeze over.
Neighborhoods sit with vacant homes for years and are stripped of copper, siding, system mechanics, windows etc. Now here is the bit thrust of the plan when the markets recover... the government plans to sell back to the banks the same assets sorted or graded to current market. Now the value of the home has dropped to 110K in a blighted, crime ridden neighborhood that no one wants to live in. The homes are marked to current value and sold for 37K because they have been neglected for 5 years, and the crack parties have taken their toll on the property.
So a profit could be made, but it is very unlikely due to the fact they were on a 100%+ loans, and written on inflated assets, that have not been adjusted for current market value. Mr Bernake and Mr Paulson recommended the assets not be purchased at a rock bottom fire sale price from the institutions. What they are recommending is discounted. I interpret this is the government paying retail for over inflated assets. Not too smart for a Harvard man, but then again it is taxpayer's money.
So let's fast forward 5 years later - the assets will have continued a decline in value, and will slide in price precipitously because the properties will be unmaintained. Meanwhile the home that you are living in is worth 65K. You paid 265K for it, but since the government is dumping the shells of vacant homes for pennies on the dollar you're screwed. It took you 2 years to save up your down payment with 20% down. You made cash improvements in the property, and upgraded it and maintained it. Your investment is lost.
So for all that think a bailout is a good idea, it all depends if you are buying or selling.
This is a must read! Weiss Research Inc.
RE/MAX Paramount Properties 678-595-5286 Direct
Or 888-940-0074 Toll Free Office
Atlanta Real Estate & Atlanta Homes for Sale 
This plan is an unmitigated disaster. To give Paulson, a former Wall Street CEO with ties to this worthless paper, control of $700 billion... and then to PAY Wall Street to sell this worthless paper when, and if, the value ever comes back is just about the craziest thing I have ever heard from any idiot on the Hill. It is simply absurd.
Mr. Clifton,
Please consider the below information:
As the House and the Senate work through proposed changes to the newly proposed Troubled Asset Relief Program, in which the government will relieve lenders of illiquid mortgage securities, potentially to the tune of $700 billion, the Appraisal Institute has encouraged policymakers to include valuation-related language in the massive bill, as well as bring to the fore the many valuation-related issues involved. The current drafts of the TARP program do not adequately address such critical issues of valuation, according to a September 24 letter the organization wrote to Treasury Secretary Henry Paulson, Jr., and Federal Board Chair Ben Bernanke.
“Virtually every level, including the purchase and management of assets, requires specialized real estate appraisal expertise to promote the protection of taxpayers and the public interest,” said Bill Garber, director of government relations at the Appraisal Institute. “However, the current proposal pending before Congress does not sufficiently address valuation concerns, an issue in which the consumers and businesses in this country need restored confidence.”
The Appraisal Institute was joined by the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, and the National Association of Independent Fee Appraisers in its September 24 letter.
The appraisal groups provided several suggestions to protect taxpayers, including:
“The network of appraisal organizations stand ready to assist the Treasury, FDIC, Congress and others involved in crafting this critical program to provide accurate valuations of properties used at all levels,” added Garber. “The solution to the current crisis requires massive mortgage renegotiations, and we strongly believe that expert advice at the street level can restore stability in the mortgage market and build a foundation to turn the tide for other financials.”
For the full comment letter, visit www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2008/AI-ASA-ASFMRA-NAIFAonTARP-Final.pdf
Stephen A. Cunningham; MAI, CCIM
Great explaination Jim. I understand now! Doesn't sound like a good plan now!
Goodness, Jim, I do hope you're not right on this one but your explanation is simply a harsher one along the same lines I came up with to explain this situation. I am no economist, but from my perspective I think the government should, at most, guarantee 50 cents on the dollar, thus giving the institutions incentive to short sell them on the market for more than that. I think, in my very unsophisticated perspective, that would cost taxpayers less, encourage qualified buyers to pick up the properties and become homeowners, and head us back in a better direction sooner...
Fairbanks Real Estate Broker Jesse Clifton (Jesse & Kathy Clifton, REALTORS - 907.699.6024 - ) I even tried to create a graphic to explain this in the most basic form. Assets and real estate pledged are in tandem. The value of one is tied to the other. This is why no money down is never a plan...there is no pad to absorb any loss or life change. When someone stops paying and no one else moves in to take their place it is a house of cards. This is why an illegal Ponzi Scheme fails! No more suckers!
Stephen A. Cunningham; MAI, CCIM (LandQwest)
Great explaination!
Chuck Carstensen (Re/max Associates Plus inc) We are in the business, and we know real estate better then anyone else.
All the bailout paln will do is make it someone elses problem a few years form now.
Margaret Woda, Maryland REALTOR (RE/MAX VISION) I know I am right on this. I have nothing to gain. Past experience will tell you how they will behave. They will dump them when someone isn't looking! They did in every major time in the past. In some cities they sold blocks of a 100 homes to investors for pennies! This explains why banks have not been negotiating they were waiting for he government bailout of the bad paper.
FYI - This bailout does not cover loans from your local banks, commercial lenders.
I didn't know that homeowners can simply hand back the keys to the bank in the US - does the bank not pursue any debt if there is a shortfall when the property is sold at foreclosure?
Jim, yep, that pretty much covers it. Definitely not pretty and definitely a bad deal no matter how you slice it up
oh, and i feel so much better now.....thanks
Bo
Roger Hollingsworth In our area we have so many foreclosures I cannot answer that. So many persons are walking away here and mailing in the keys that it is pretty routine. They are on the hook for any deficiency.
Bo Hussung/ Title services in all 50 states (Cogent Closing Associates) Since Congress, the president, Paulson and Bernake are giving any details I had to look up an awful lot of stuff.
The Government will buy distressed notes above market (at not so distressed prices) sort the quality of them. Sit on them until the markets come back. Then sell them back to the the institutions.
Something is too simplistic about the government plan.
We have seen Wall Street recently sell "toxic mortgages" for 22% of retail , but it was really only 5% of retail with seller financing the remaining 17%! So there is a bottom price!! No need to hire accountants or anyone for that matter. Here is the solution:
Foreclose and sell the house to an investor for 30% of retail by taking 5% of retail down from the investor and finance the remaining 25% of retail over 30 years. EVERY AVAILABLE HOUSE IN AMERICAN WOULD BE PURCHASED BY INVESTORS IN LESS THAN 180 DAYS! Stability will then slowly return to the housing business as the economy improves. The new loans would be very liquid as they are low loan to value ratios and the borrower would have the type of credit score and finances needed to make the mortgage purchaser comfortable.
Why can't Wall Street and Congress figure it out? You say it is not enough money for the original holder of the paper? Then have them hold ebay like auctions to see how high a real buyer will go with the type of financing recommended. Again, no need for accountants as the market sets the price!
The bailout plan is a joke and the American Taxpayer is at the brunt of the joke and not laughing. There is over $3 trillion sitting in money markets looking for better returns which I know would jump into real estate if the suggestions were implemented.
Phil You're right! To admit that would be to admit instant insolvency. The banks want their cake and eat it too. They want someone to bail them out, no admission of guilt and they can plan next years vacation in Maui and get the tires and oil changed on their BMW. No big deal. The American public don't care what they do, they'll let Congress do what it wants to do, and after elections Congress will come back and ask for a 1.5 trillion dollar bailout for something else.
I agree there are many other solutions,they just can't make any money off them.
In effect, Jim, it sounds as though the buyout inevitably becomes our responsibility, the tax paying community, and the banks are rewarded through the renewal of resources from the treasury efforts. The property also becomes a part of the banks portfolio, the depressed value as an reo staggers the direction of value, and further price declines manifest themselves, creating more chaos where lending is an issue during the consideration of the processing of new mortgages in a volatile market.
I'm very worried. But I know better days are on the horizon for all of us. I almost fell out my chair laughing when I opened the page and saw the graph; but it makes perfect, frightening sense. Hope your having a great weekend.
David Saks - Real Estate Broker (The Real Estate Mart of Tennessee, Inc.) David we are all worried. I think either way the taxpayer loses. The bailout does not fix the foreclosures. It will provide an ass backwards plan to address the bad paper notes that no one in their right mind wants. This bailout is very limited in reach, and should not be viewed as a panacea for all ills.
Heres what the bailout does not fix:
Hey Jim,
Here is some reading supporting "Here is what the bailout does not fix" you mention. Hope you find it interesting. There are a lot of statistics and information. Curious to know what you think.
Weiss Research Inc.
Proposed $700 Billion Bailout Is
Too Little, Too Late to End the Debt Crisis;
Too Much, Too Soon for the U.S. Bond Market
Lisa Glowacki When it is all said and done, 700 Billion addresses nothing. It will be the first of many, many more installment payments to follow. For the politicans, it buries the problem until after election day. The report you sent confirms a lot of my own online research. It really is a must read for all!
Weiss Research Inc.
Jim - nice explanation of the bailout. Big problem is this helps the banks and not the consumers who are losing their homes. Hopes are this plan will stimulate the economy and open up more money to lend from mortgage bankers like myself. Personally, i don't see it happening. The focus needs to be turned more to people losing their homes and allowing banks to loosen up credit guidelines which will in turn lead to more loans and stimulation of the economy. I think initially this bill passing may have a positive effect on mortgage rates but eventually when it becomes obvious it is not a fix to the problem, ( ie... FHA secure ) , we could be in for the hard landing I have been predicting.
Lewis Poretz - Open Mortgage - Maryland Mortgage Expert I Have come to the realization that none of these fixes are about real estate, and everything to do with the banks. Nothing that has been done so far has made the hones start ringing again
Your analysis of this situation is spot on as usual. I've been watching one community in my area with great interest. It was presented as a high-end premier location and is now turning over with rentals to cover the existing mortgages. The problem is already escalating as foreclosures are filed and tenants receive notices to vacate. What a mess we are in and this so called bailout is just the beginning.
Jim: Thanks to Congress... home values will decline for the next several years; dollar will decline; you will pay more for food and gas; interest rates will go up; Taxes will be raised. If your Congressman votes for the bailout - vote against them in November.
Debbie Small, CRS, GRI (Long & Foster Realtors) The banks were willing to ask withno questions asked at any level. Now the damage is done they look to the taxpayers to bailout a few. I look at those citizens that took no risk during the last few years, did not borrow against their home equity to by the BMW or Benz, did not flip their home - they are the victims. Their neighborhoods are now trashed with foreclosures are either side of them, their jobs are now threatened, and congress wants to bailout the ones that caused this? Congress caused it when they changed the rules. They caused it when they wanted persons that could not afford a home to own one. People that had no money? No problem! Well it is a problem. A big one!
Jan Wood, Realtor (R) - Nashville TN Real Estate (RE/MAX ELITE) My representatives all voted against it. My senators office even called me from DC this moring to voice their concern.
So most of you commenting on her are business owners or real estate brokers. Hmmmm it start off with you guys you damn morons your the ones who want to sell a property for a higher price so you can make as much commission as you can.Or raise the price in your stores what the hell is wrong with you people we are all to blame because am we are a greedy nation. Thats all it comes down to you morons just want to point the finger at someone else and not take any blame. Man hard workers are losing billions because of idiots like you We all cant afford the bmw and mercedes that your wife drives so you all need to rethink where you stand in life. And stop being so greedy if the government bailout works well you all will be like oh you know blah blah and if it doesnt work then you all will be like blah blah blah start being more honest and then maybe we wouldnt be in this mess.
Jim - I agree that this is an ugly 'solution.' Paulson, et al are kidding themselves if they believe that this is going to be a profitable or even economically neutral investment for the government. For many of the reasons that you mentioned, this is expense money that will not be recovered. I was sickened when I heard Paulson didn't want to by at discount prices and wanted to incorporate more than MBS. However, I see few alternatives to restoring confidence and lending. I'm not just talking about home lending, I'm concerned about about a complete credit freeze. What happens if the cost of capital for GM to build their new $370M engine plant doubles? What happens if a small business owner can't get a loan to cover slow times? What happens when construction companies can't afford proper equipment to complete road and bridge projects? All of these things cause further slowdowns, increased layoffs and worse. The bailout sucks. No bailout sucks worse.
Erik Hitzelberger, --Louisville-Bullitt County Real Estate (RE/MAX Alliance) What happens next month after elections when they OOoops realize thereal number needed for this bailout is really 3.41 Trillion? Please keep in mind, this bailout does not cover commercial real estate, defaulting local banks - and basically only covers crap SMO, and CMO's that are junk. Will you feel like you were screwed when you find out this is just a ploy to get you past elections?
This is not a fix. This is a bailout for those that caused this.
Excellent analysis Jim. You've articulated all of the fear and suspicion that's been rattling around in my brain the last few days. The prospect of millions of government owned homes sitting vacant waiting for the market to "come back" is the worst case scenario I can imagine. When the average home costs more than the average buyer can afford the price must fall. Instead the government proposes to blow more air into a collapsing baloon. There are plenty of buyers for the current inventory of foreclosures and short sales who will upgrade them and put them on the rental market or resell for a reasonable profit, but the banks need to accept the fire sale prices they are being offered rather than relying on their phony appraisals. Bailing out the banks will only create more perverse economic incentives. I would encourage Realtors to contact the NAR which is currently using our dues to promote this boondoggle.
And by the way Hard Working Guy, Realtors have zero control over the price of real estate. It is the buyer who determines the value everytime.
Greg Booth
Re/Max Forest City
Jim, congrats on your feature on the RE/Max Mainstreet Opinion poll today. Great PR for both you and AR. Good anaylsis also.
Greg Booth I am glad it helped. I had to draw this out so even I could understand it! It does not make sense. I wonder if this is why 12 of Barney Frank's own committee voted "NO!" What does that tell us?
Lyn Sims - Northwest Suburban Chicago Homes (RE/MAX Suburban) Thanks! I just received an email from the powers that be informing me about this! We need to air out this issues, and not sweep them under a rug. If we had transparency, none of this would be an issue.
Jim - I am not in favor or against the plan. However, like every explanation I have heard you have over simplified the plan. First, the securities are backed by many debt instruments, not just a single mortgage, and since 94% of the current loans are being paid the govt will be be getting those at discount also. Second, it is my understanding that the securities would be purchased via a reverse auction, therefore the institutions will have to discount the packages and only the most discounted will be sold. Third, the reason for this approach is so that the institutions will be able to raise capital, currently no one is buying. It is Paulson's hope that by creating a market for these instuments the private sector will also come in to take advantage of the discount. There is no doubt that even with these actions many of the these institutions will still fail.
Currently estimates are that 5% of mortgages are in some level of default. As Stephen A. Cunningham; MAI, CCIM points out in his comments the real problem is the valuation of these instruments. It will be imperative that we the tax payers do not over pay.
The issue of these security instruments, derivatives and swaps that all have traded on mortgages is complex beyond my knowledge and unfortunately just about every American, and with the press labeling this as a "Bailout" for banks the understanding gets worse. Unfortunately this problem is affecting every single American. If banks can't loan to business then they close their doors, more people become unemployed, and the default rate goes even higher. Peoples retirements are at great risk, since almost every mutual fund, money market fund, and insurance company has some form of exposure. THIS IS NOT A BAILOUT FOR BANKS... IT'S A BAILOUT FOR EVERY ONE OF US!
I don't claim to be smart enough to say whether this is good plan or not... but I do know that if we just leave it to "survival of the fittest" we will see a collapse in our economy the likes of which most of us have just read about.
Greg Pittas - I totally disagree! A 100% loans in a declining market? We have all already lost! These were bad loans! Sometimes the easy solutions aren't the right solutions. How many generations will we wait before the junk loans will be worth what was paid for them? This was a house of cards, built solely on greed!
Jim,
There is a MAJOR flaw in your explanation. You assume the purchase price of the theoritical mortgage to be $220,000. If that were the case I would agree with you this will not work. However if that were the case we also would not have a problem. The current value of the MBS (Mortgage Backed Security) is averaging around .22 cents on the dollar.
Under the proposal the Treasury would be buying these at a "reverse auction" from the banks, or investment houses. It is realistic to assume that the low price would be below the current average. Therefore your theoritical mortgage would be bought for something around $55,000 or less. While you are correct that the value of the underlying asset is uncertain at this time, we are talking about American Real Estate so it does have an intrinsic value. If the original value was $180,000 as you example puts forward then on "average" we can predict a 3% annual growth in value. Of course all real estate is local in nature and there will be exceptions on both the down and up side. But the bottom line is that MOST of these securities will increase in value quite rapidly from the current market.
David E. Rose - Thank you for your explanation. I totally disagree with your premise. These are tied in tandem to real property that is free falling from inflated highs. You may have made a fatal assumption of appreciation also. If we follow the Japanese markets we could fall in property values, and related securities for 15 years.
This bill is really nothing more than a sweep it under the carpet bill and don't ask any questions until after elections. Loads of hard working people that have already paid dearly with loss of equity from their homes in once stable neighborhoods will have to foot the bill once again for the culprits that caused this.
The bill is also extremely limited in scope, and does not take into account real estate per se. In fact real estimates of the losses are much higher than 700 billion. From what I have read they are really closer to 3.4 trillion.
So the soon to be adjustments for the next 3 years of Alt-A's, commercial real estate that is just showing major delinquencies, properties that are already foreclosed on are not in the fix! And that is the right term - an "Election year bandaid fix on a dead corpse!" Politics as usual in DC!
My fear is there is no definable line that separates who should receive bail out money and who should't. Where do we stop and who is left to determine if the funds are going where they should? The term bail out should not even be part of the vocabulary in a democratic society. My Active Rain blog post this morning morphed into a page long rant on what I would like to see happening to revive our economy. Click here
I don't know anyone who thinks this is a good plan. It took me 6 months to decide which Blue Ray dvd player to buy. Research, word of mouth and price comparing. Big decisions take time. This plan was rushed through and I think we will pay for it!
Mike Montague (Sutton Group Incentive Realty Inc) Thanks, I read and commented on your post. Very well said!
Team Endicott (RE/MAX Ability Plus) First of all as we are finding out now there wasn't even a plan. I like your analogy about research. Did you know for the biggest bailout in history there were no Congressional Hearings? NONE! NADA!
It was nice of you to post the Weisss Research report, good read! Thanks.
Absolute Appraisals, Southern California (Absolute Appraisals) Thanks! Have a great day!
Good analogy. Should I stop making mortgage payments? I'm kidding, that's completely unethical.
Kevin Wood, Tucson, AZ Realtor (Realty Executives I think for many persons, theey do not feel they have any other choice.
Fortunately, there are still some Americans who have jobs and are still making a good living and are able to meet their financial obligations. And yes, there are many who say, why should I care about other people when I still have a job and I still pay my mortgage on time? Problem is, it is very likely that if the Depression continues to worsen, you too will be out of a job and then what? Looks like we can either help the banks, and we all know that has not worked, or get to the root of the problem and help the people who are having trouble making ends meet so they can make their payments. People with a family, medical or dental bills, or children in College have a hard enough time making ends meet let alone saving $20,000 for a down payment on a house! The Fed could use the "Bailout/Stimulus" money to pay down, or refinance individual consumer's personal debit including one single family personal dwelling, and if unemployed or under employed at the time give those people 6-12 months to make the 1st payment. The Banks would be paid off and now have money to loan, consumers would now have manageable debit payments and feel confident spending again! The Fed is currently lending to Banks at around 2% interest right now! They could lend to the American Taxpayer at 3%, 30 or 40 yr. fixed rate, and might actually make a profit. Some say why, I say Why not?
Steve - As much as I am probably not a fan of what you suggest, in the long run and even short run...the government could turn the entire economy around very shortly if it had done as you suggested. It would have worked. They will now spend 10000 times that amount and still won't put out the fire.
It has now been alleged that the Reason the Banks won't say what they did with the first $300 Billion in Bailout money is because they have used the bulk of these monies to back Corporations taking jobs out of the USA and expand their foreign manufacturing and financial operations outside the USA ... It's time we get the money to the struggling American Homeowner on the brink of Foreclosure and put an end to this masquerade!
Why won't the Banks tell us where the money went? - It is a major game. I read someplace the other day that there was some place in the area of 78 Billion dollars for that is unaccounted for...
I agree. America is talking, but Washington isn't listening! The Banks and the Oil Companies created the mess we are in today, and our Government wants to give them More money??? The Fed wants banks to loan and free up credit, but banks know most Americans no longer qualify for loans, or just don't want to borrow! If the Fed used the "Bailout/Stimulus" money to refinance individual consumer's personal debit and mortgages, same as you do for Bankers, the Banks get paid back and now have money to loan, consumers now have manageable debit payments and feel confident spending again! Maybe 4% fixed for 30 - 40 years. Every they ignore the source of the problem, 1,000s more loose their American Dream! We need a moratorium on Foreclosures NOW, until the plan goes into effect!!! And don't forget, the next election is when we can show our elected officials what we thought of the way they handled all of this!
Steve Thank you for your comments.