November 12, 2008

The Banks Are Finally Stepping Up

No Auction for Bad Mortgage Debt

Buying up bad mortgage debt was once what the TARP program was at its core. The idea was that banks would begin to lend again if there balance sheets were in better shape and they knew the value of what mortgages were worth. Because no institution was any longer buying mortgages, they couldnt put a value on them. Finally deciding to be prudent (after tanking the entire system) they just stopped lending.

The Govts first answer was to create an auction since this would provide a market place and others could bid on bank paper thus establishing a price. The banks would then be able to see what their balance sheets were worth and the Govt would buy up all the bad paper no one else wanted.

Happy banks lend money right? Not this time.... Ten banks were given 25 billion dollars to grease the wheels and start the lending process. They decided to use the money for bonus's and mergers. Salaries and junkets continued.

The New TARP Program

TARP now agrees that the auction idea was a bad one. It was a give away, whereby we would own the worst of the mortgage debt and banks would get to step away from the problem they created. it decided that giving capital to banks in return for preferred stock was a better use of the funds. This makes the Govt an owner and able to direct some of the bank activity as a major owner. I like the idea of this kind of control, if it is exercised on our behalf.

Much of the money earmarked for the auction will now go towards credit card debt, auto loans and student loans, much ore directly to the benefit of the people who have been harmed by irresponsible lending.

Some new facilities for commercial paper and a possible liquidity facility for highly-rated AAA asset-backed securities, will help bring back the money flow.

The Bank Can Sort it Out

Bank of America has been ordered to renegotiate some 400,00 mortgages it inherited from Country Wide. A slew of foreclosure-prevention initiatives were announced by Citi. IndyMac is in a similar process.

What Does it Mean for Real Estate

Now that the banks are stabilizing and will be forced to work out loans, we should see less foreclosures on the market, less short sales and eventually a long bottoming out process. With 7-10 million homes late or in default this is finally the beginning of a direct response to that problem.

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Thanks for Reading

Howard Bell

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