First, this isn’t Bush’s plan. It’s the plan of experienced financial leadership, in government and mostly outside, of pretty realistic people trying to overcome the bullshit passed years ago that caused this mess. Bush couldn’t explain the details of this plan if he had a….well he just couldn’t. [This is a long post but please stick with it.]
The leadership in Congress, also, has made it clear that the homeowner and middle class has to be included or it’s not going to pass. The leadership, however, isn’t in a real strong position. If they don’t pass some bill, even an interim bill, then they will be blamed for a possible meltdown. And the election will go to McCain. If Bush vetoed an interim bill, causing more stress on the world markets, then the election goes to Obama.
Since the bill isn’t finished anyone talking as if they know the details doesn’t. No one will know the details until the actual finished product is printed and read after negotiation with leadership. One of the other primary essential realities of this situation not mentioned in those links is that the bailout essentially buys distressed assets (mortgages) for a very small amount compared to face value. They are however ASSETS. Most of the 500B initially allocated, and expected to be used, will be secured by this ‘paper’, as it’s called in the business.
Also not being mentioned most of the time, mortgages have no holding cost and a defined market value that increases over time if bought for a song. It’s a question of timing as to when to start to liquidate the assets. In this case, once the ‘sub-prime’ mortgages develop a 2 or 3 year history of good payments they are no longer subprime. They could be refinanced into a conventional loan or the paper simply sold at much more than the purchase price.
If the house has devalued and they are mortgage over value then the short sale or short refinance (the very likely most risk-limiting path) will end the governments involvement and bring cash to the program. A loss on an asset is acceptable compared to the cost of the sale of a foreclosed house. The foreclosure process and selling that foreclosure is a much more complicated process that leads to much, much greater losses. (much more on the flip)
It’s already been announced over a month ago, there is going to be a new program through FHA that will allow people to refinance out of these loans that kicks some date in October. Loss mitigation specialists are popping up all over the place to work with lenders already. And they are having success. The lenders are writing off parts of the mortgage and/or ‘recasting’ the mortgages into a rate and term that the owner can afford.
Hell, one of my friends got his mortgage, even though he had some equity in the house, recast down to 3.95% for the balance of the life of the loan. Now that’s a mortgage that going to be paid and the interest rate is still equal to the cost of funds if not more.
Remember in the S&L crisis there was also a deep seated fear that the system would melt down. We experienced big losses but no melt down. Some of the stupid moves by the banking regulators and the RTC made it even worse. And yet we got through it.
This is NOT a giveaway. Our government is going to take a hit but if they are patient and show some common sense this ASSET BASED bailout is far different than being seen by columnists that think the assets have no value. While the loss will be in the billions it won’t be as much as some are saying. There will NOT be a complete loss of 700B. The eventual sale of the assets, mortgages and houses, will bring much more cash than is being printed in the headlines.
My history to back up this analysis:
Having lived and worked very closely with some of the biggest organizations in the S&L crisis, I know for a fact that one of the primary mistakes made at that time was trying to liquidate the primary assets of that crisis immediately. When they appointed the RTC as the final authority they started really almost giving away real estate. I know. I was buying apartment buildings with both hands in Texas. My partner and I bought and sold to Californians 400-500 units in small buildings. I think the largest we bought and sold was a 20 unit building. We should have kept half and we would have been millionaires within five years.
I knew many of the names that would be familiar including Charlie Keating. Hell, I used to sit in his office in Irvine. Charlie screwed up when he sold unregistered securities to retirees. It was the securities violation that got him in jail. If I had listened to his advise I’d be sitting pretty owning a couple of Texas Holiday Inn’s and a bunch of single families.
If, however, they’d (the government) have left him and some of the other big organizations alone to work out their real estate problems we’d never have had the blow up we did. Keating’s really different as an individual as he broke the securities law. There’s a whole history I could write about the mistakes made at that time. It seems that history is being remembered right now.
Real estate, however, is far different than holding mortgages.
Oh yeah, I’ve got 28 years experience mostly in investment and mortgage real estate.