I think it's safe to say that no one really wanted the $700 billion bailout. Unfortunately something had to be done as the credit cash-flow spigot was down to a drip. Even those with good credit were beginning to have difficulty getting funding of today's tighter standards approved loans. Not only in our own industry, but just about anywhere, a 700+ credit score was no longer good enough. For business, equity credit lines were being shut off and large business commercial paper unable to find takers. These short term business loans are how they keep the doors open, pay the bills and payroll, and buy materials and supplies, while they wait for their money to come back from the billed customer. Not enough cash flow for 30 to upwards of 120 days can be tough to manage in a household, let alone when you have so many households that depend on them for a paycheck. The alternative is to cutback, and the last thing we all needed is more national unemployment.
The finger pointing heads to Wall Street, creators of exotic loans. From there to mortgage brokers and loan officers for arranging loan funding. Real Estate agents because they sold these homes at the increasing market prices to buyers knocking at their door. Home builders who supposedly 'overbuilt' in their quest to keep up with demand. Greedy? Yes there were some in the mix, some even to the extreme of fraud and now arrested or investigated, as should be. The rest were simply doing their jobs and caught up in the mad rush. Even the majority of media was on board, cheerleading the boom and the economic growth and prosperity along the way.
There were others that were greedy as well. Some home buyers and owners for one. Exotic loans or not, you still need to know what you can afford....or not. To this day you often hear "it was the credit card companies' fault" for some amassing debt, because the lenders increased limits or sent offers in the mail, and made it 'too easy'. No, not that people need to be responsible and budget themselves, and that available credit lines are to be used wisely and to your advantage, not simply buying until they max out. The same happened with some home owners that began cashing out equity, using their homes as ATM's for extravagances or 'moving up', on equity credit they couldn't afford to repay. Yes the system was loose, but it's a 2 way street. The majority respected their credit, and they most likely have even more opportunity to extend it well beyond their means.
That brings us to the uneducated speculators, especially in the 'hot' markets, like Las Vegas. They bought up homes like hotcakes, but couldn't afford to carry the 'investment'. They created an imaginary demand, and in turn artificially inflated prices. They helped create a battleground and bidding wars for legitimate home buyers and investors, that added to the feeding frenzy and more hype to the media. I myself had 6 months of 'oops, just missed it', and my parents later shocked with a 'lottery' on building lots, and 2 months of searching resales to finally catch a lucky break (literally) for them to be able to buy.
All the while our 'leadership', from both sides of the isle, kept a blind eye. The too little, too late housing bill of this summer, years after the opposite swing of the pendulum began. Now we're caught up in election year divisiveness. He-said, she-said mud slinging ads to divide and conquer have been filling our airwaves and our mailboxes, at a time when we need to pull together to dig out of this hole. Instead we hear a barrage of constant negativity from the media, that not long ago was lauding the housing industry as the white knight leading the charge from the recession and added devastation of 9-11 a few months later.
While details are few of how this $700 billion will be used, the media does little to explain anything. Instead they throw out misleading information on costs to taxpayers, to households, and 'Fat Chance' as to if it will work. They use their 'news framing' to keep the public tuned in, instead of offering an objective view and truly informing the public of all sides of the issues at hand.
First you need to understand that sub-prime mortgages and foreclosures aren't the only problem with this financial crisis of banks holding 'toxic loans'. At the moment it is estimated that foreclosures account for roughly 3% of all outstanding home loans. The issue is, what that and the falsely inflated home pricing had caused. A reduction in value for the rest of us home owners, many of whom may have had a downpayment vanish, equity disappear, or are now upside down even in their conventional mortgage. The banks are holding assets that have devalued from solid upstanding home buyers. Should they need to move for employment, they are often trapped in their homes to either take a loss they can't afford, or to walk away and add to the problem. Not a good situation in an economy that is shrinking and shedding jobs.
So how will this 'bailout' be handled. Again the exact details aren't out, but it's safe to say the government will be buying these mortgage assets, that will also include commercial loans. Buying at face value? Probably not, more like pennies on the dollar. It's not unlike what you may have seen with cash investors entering the Las Vegas real estate market, purchasing bank owned properties at below value prices and able to hold until the market rebounds.
IF the market does return to normalcy and has some stable growth along the way, there could possibly be a profit returning to the Treasury over time, not taxpayer debt. That's what these investors are looking at, as well. Unfortunately you don't find explanations of that making headlines of the bailout, and may have to go as far away as India for an objective story.
The treasury will have the option to help out homeowners though the process. Reconfiguring the loans for some and slowing the bleed of foreclosures into the market that hurts everyone's values. They can also begin repackaging solid loans for resale to investors at a new face value that could offer returns. Will it work? That depends on how many investors look past the fear and negativity that abounds. As you can see from the Business Standard article above, the banks will still need more liquidity for all to come together. I'd expect to see some more from the Fed and the Treasury along the way, and from other foreign governments as this has esxcallated globally, but so much depends on returns of capital investment into the marketplace.
While some, including billionaires, have professed government bank takeovers and preferred stocks for ultimate control, that also raises issues. Would there be Congressional support for nationalization of banking, or more boondoggle with some crying socialism, leading to lengthier debate while Rome burns? Mass confusion from the government bureaucracy, with it's hands in control of so many individual lending institutions, and how many people needed and how much time to organise it all? In either method, it still needs the support of the private investor to come on board.
So no, the entire problem is not just about the evil loans of Wall Street, it's now about the average homeowner that has been gutted by the greed of wild speculation. The same thing was seen in the tech bubble burst of the 90's, where penny stocks of 'tech companies', even without any business or building, were drummed up into the hundreds of dollars before they imploded. We all just saw it again with the speculation in oil futures with estimated, or fabricated, 'demand'. A few ran up the market, leaving the masses to pay the price at the pump, grocery store, job losses, and beyond. Leverage and risk taking can be good and create growth, but only works when used in moderation. Wild price fluctuations are typically the first clue of something gone wrong.
A number of the 'exotic loans' did help create grwoth and jobs, and the majority achieve home ownership and they did pay their bills. Yet now all are stuck in this quagmire with the rest of us. Downpayment assistance also helped many, but because of a few that failed with the hand up, the programs were axed from the 2008 Rescue Bill. Fortunately that has been brought back to the table with HR 6694, now with added protections and guidelines to help reduce abuse of the system and help insure against those slightly higher percentages of loan defaults. The bill has passed the House Finance Committee and next to be brought to the floor. The recent Congressional Budget Office Report on HR 6694 concludes that with it's estimates it would have a negligible cost to taxpayers. Obviously if allowed to return in it's new form, it could help reduce national home inventory that is hindering the market's and our economy's stabilization. You can find out more and send a message to Congress at SupportHomeOwnership.org.
Yes there are a lot of questions yet to be raised and no one can predict the future. Obviously much of our success, or failure, will depend on whether a half-full or half-empty attitude prevails. That's why I wanted to present some of the other side of the story that seems to be missing from the major news of the day.
If you are interested in relocating to Las Vegas or would like information on Las Vegas real estate, please email me, Roberta LaRocca, at email@example.com, or call me at 702-354-8988. I look forward to hearing from you!