With economy moving a continuous downward spiral, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke pleaded with lawmakers to approve a bill for $700 Billion dollars to dispose of “toxic” assets from financial institutes (sub prime mortgages). The basis behind this bill is to do what is called a reverse auction to purchase the toxic assets from major lending institutes. The mortgages are purchased in bundles (ex. 1,000′s of mortgages packaged together). According to Jim Cramer interview, the host of Mad Money, the mortgages purchased this way would be considered assets. With the packages maybe only 10% on non-performing loans, leaving 90% performing and viable.
With taking the financial hardship off the lending intuitions from the non-performing assets, the lenders are now able to free up capital to lend more money. The thought behind this would be in turn to help stimulate the economy. With the government now in control of the sub prime mortgages, they can now renegotiate the terms of the loans to make them affordable and performing.
What will this do to the real estate market place?
- I have heard that it may help curtail the foreclosure/REO marketplace. With the spiral effect of slowing the foreclosure entering the market place, home prices may then finally find a bottom number and begin to slowly over time begin to build steady and consistent equity.
- More capital freed up by the lending institutions means more money to lend. The over all effect of this would be a stimulus to economy.
It seems as though neither candidate wants to take a position to support or reject the bail out bill. If they support they run the risk of alienating already financially strapped families that cannot afford an increase in taxes as well as people that feel that they are not responsible for irresponsible borrowing and lending. If they reject it, we could see a further deterioration of the economy.
There is a lot more to learn about this bill over the next several days and I am sure this will be a focal point of the presidential debate on Friday 9/26.
Please feel free to post your thoughts on this issue.