What Do You Think of the Stalled Bailout Plan? What's your opinion of what's happening in Washington, D.C., this week with the proposed $700 billion market bailout proposed by the Bush Administration and rejected by the U.S. House of Representatives on Monday?
Send your comment to editor@remax.net for posting in this online exchange.
As a starting point, here's an excerpt of what RE/MAX Greater Atlanta's Jim Crawford, a popular blogger and columnist, posted on his ActiveRain blog Sept. 26:
Has anyone really explained the government bailout to you? Me neither! Let me see if I have this right. Let's say the $700 billion does not represent homes. It represents the bad home loans that have been securitized into paper instruments that are supposed to (look) 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 at risk. Now enters the government with a rescue plan. Here is an overview. A 100% loan is made on a home that costs 250K. The home mortgage is sold to a new institution that turns it into a paper instrument. The note is packaged and sold off to a bank that can't get rid of it. Why? Six 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 payments because they were unaffordable. Now it is society's problem. He then mails his keys back to the bank because his neighborhood has 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 the same boat. Other neighbors are in trouble also. So here is where the government plan kicks in.
The government buys these bad notes off the institutions for, let's 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 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 five 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 100%+ loans, and written on inflated assets that have not been adjusted for current market value. Mr. Bernanke and Mr. Paulson recommended that 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 overinflated assets. Not too smart for a Harvard man, but then again it is taxpayer money.
So let's fast-forward five 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 two years to save up your down payment with 20% down. You made cash improvements to the property, and upgraded it and maintained it. Your investment is lost.
So for all who think a bailout is a good idea, it depends if you are buying or selling.
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E-mail your comments to editor@remax.net. Please include your full name, RE/MAX office, city and state. Comments, slightly edited for length, flow and punctuation, will appear below.
Comments (6)
The American dream has been financed 100% long enough. Accountants telling clients to increase their debt to get a short-term tax deduction is not good policy. The government shouldn't bail anyone out for these and other bad business decisions. With that said, the government is just as guilty as these Wall Street companies.
As much as I hate government being in business, the solution could only be a buy-in. This idea has been thrown around this past week and is probably the best idea so far. Unfortunately, this is going to mean using money borrowed from China or the Middle East. These companies must now sell their debt to the government and be at its mercy in regards to reform, restrictions, and control. This will help the banking industry by reining them in - long overdue.
- Shami Sandhu, RE/MAX River City, Edmonton, Alberta
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If Congress does not pass legislation to authorize this cash infusion into the economy there will be very little credit available, which will impact home prices even more, and cause a recession. As a Realtor, I certainly don't want to see that. Also, the hard-earned money that most people have in 401(k)'s and other investment portfolios will be whittled down to nothing, thus leaving many people who have been saving all their lives for retirements with nothing, and having to keep working. If there's less or no credit available, many companies will not be able to borrow money to grow, advertise, etc., so they will begin laying off employees. I am in favor of the "bailout" although I think there should be tight controls and oversight to ensure that the money is used for its intended purpose. What started out as a 3-page bill is now over 100 pages and growing, so perhaps the powers that be are writing in some language that will protect the American taxpayers. If they had called this something other than a "bailout," like "economic recovery plan," and explained why and how this will be done to the American people, I don't think we would have seen the negative outcry. This negative outcry from the public has also been influencing lawmakers, who are striving to win votes right now in their races. Interestingly, every single one of the "no" votes came from officials (both Democrat and Republican) who are in close races right now. Hmmm. Whose interests are they serving, I wonder?
- Izzy Zarrillo, RE/MAX First Choice Real Estate, Northborough, Mass.
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Where is our leadership, character and compassion? The mortgage LTV ratios and appreciation could not be maintained because real wages are declining. The catalyst that broke the back was the sharp increase in gas prices, which took away the few discretionary dollars people had. Once their credit cards were full, something had to give. Debt, fixed and variable expenses have outpaced income. It's all about cash flow. This "crisis" has been long in coming. I believe it started in the '70s/80s decades as we started to break unions and move into a global economy. Japan, GAAT treaty and Mexico, Indonesia, China building everything we buy - dumb! Gradual moving of jobs, decrease in the real wage and increasing debt. I feel three things have caused our current predicament. First, short-term consumer debt was eventually moved to long-term debt as our homes became piggy banks that could be used as piles of money to buy consumer goods or vacations, pay off credit cards, etc., rather than fund home improvements that would increase market value. Second, the free flow of money created an artificial, sharp increase in demand, which increased home values. This increase can only be maintained if income can support it. It cannot! Third, now they have shut off the money flow liquidity and - image that - home price are falling because demand is down. Our Congress and Wall Street experts are panicking because no one knows how far land value, their base for all lending, both residential and commercial, will fall. They created this mess and forgot that good wages for consumers needed to support all of this. Wages or real income to support the American way of life must increase to the level that we can support our very complex society. If not, then our entire way of life has to adjust to the lower "global" income level. My opinion is reinforced by Steven Leeb's book, "The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel." It is the government's choice to mediate the pain, but the pain is not going away. We have two choices: (1) A depression and America goes bankrupt and adjusts financially or (2) The Government steps in and tries a gradual fix with a mix of free-market forces monitored and incentivized through regulation and real tariffs. In a nutshell: STOP, restructure the debt with a cash flow plan, put Americans back to work in real jobs, adjust our expenses so we can pay the bills, and America will work its way out. Otherwise, God help us!
- Thomas Otis, RE/MAX Valley Realtors, Neenah, Wisc.
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It is a shame that these large companies took calculated risks to obtain windfall profits. The problem is that their risks now affect every small-business owner in America, and we did not take those high risks nor profit from the gains. When has the government ever bailed out the small businessman? We the small-business people will find ways to carry on or close shop, while we the American people end up paying for these bailouts. This really seems unfair! So let's reward their greedy business practices with a lucrative $700 billion, while the small-business owner continues to feel the domino effect.
- Margaret A. (Peggy) Mardis, RE/MAX Excel, Arcadia, Fla.
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I oppose the $700 billion bailout for the same reasons that I oppose nationalization of the assets involved in the bailout. I am not a fan of the policies put forth by Karl Marx. Here is a great description of the problem.
- Steve Cottrell, RE/MAX At The Lakes, Vonore, Tenn.
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One critical component of this lifeline to our economy is being overlooked. The net asset value assigned by the mortgage bank versus the true market value is the number the mortgage banks, security holders, et.al., expect the "bailout" to compensate them for. The true market value of the properties ought to be used versus the net asset book value, given the failure of the mortgage banks, security holders, et.al., to legitimately assess their risk in the first place. To be compensated with taxpayer dollars for not doing due diligence is ludicrous.
- Lynn Carter, RE/MAX At The Lakes, Loudon, Tenn.
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Copyright © 2008 RE/MAX International Inc. 9/29/08