Bailout Plan

The government is expected to announce soon that it will devote up to $50 billion to directly address the source of the financial crisis: bad mortgages and millions of homeowners at risk of foreclosure. No decisions yet have been made on a number of housing proposals. New program would be designed to prevent foreclosures by having lenders reduce delinquent borrowers' mortgage payments to affordable levels. In exchange the government would guarantee some percentage of each loan to backstop lenders if borrowers re-default on modified mortgages. The plan could help up to 3 million homeowners. The plan being considered likely would not require such a strict write down. Instead, it might require that the new payment for the borrower be affordable. Monthly payments can be made affordable by, among other ways, reducing the interest rate for a period of time or extending the term of the loan. Typically one way to determine affordability is to consider a delinquent borrower's debt-to-income ratio. At Indy Mac, which was taken over by the FDIC this summer, loans are being modified so that borrowers' new mortgage payment - including insurance and taxes - does not exceed 38% of their pre-tax income. The new government plan could offer lenders a way to reduce their losses on troubled loans. Lenders would have to modify the loan to make it affordable. Funding for the potential initiative would come from the $700 billion financial rescue package passed by lawmakers in early October. To date, most of the money from that package has been devoted to getting the credit markets going again. Details of the plan are still being worked out between the Treasury, the White House and the FDIC. The government and lenders are behind where they should be in terms of preventing avoidable foreclosures. And that while voluntary programs have been helpful, going forward there needs to be a package of incentives. On Thursday, the majority of Senate Democrats on the Banking Committee sent a letter to President Bush urging him to use the powers granted under the financial rescue package "decisively, aggressively, and swiftly to reduce foreclosures." The fact remains that the administration has not dedicated the time, attention or resources needed to address the cause of the crisis - the historic levels of foreclosure.

What to do with Upside Down Real Estate Investments?

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The Housing Market

The solution for existing housing market troubles is nowhere in the sight. It seems to be getting worse as the time goes on. We see daily that the government is trying to solve the crisis that we are in.

The feds are considering guaranteeing payments on some troubled mortgages. The move would aim to reduce foreclosures by pushing investors and lenders to agree to restructure loans.While such an outcome would no doubt keep some residents in their homes, it's worth noting that the government has yet to put forth any proposal that approaches what it has done in the financial sector. Government support for homeowners has been limited to a few modest foreclosure-reduction and mortgage-refinancing plans. But with tens of thousands of jobs being lost every month, the decline of values in the housing market - the biggest source of Americans' personal wealth - is weighing even more heavily on the economy. House prices have fallen 17% over the past year. Foreclosure filings rose 71% from a year ago in the third quarter. The government's failure to act pre-emptively and decisively on the housing crunch has only added to the problem.  The comments Thursday by FDIC chief Bair suggest that the government's first priority is to speed the restructuring of troubled loans. But there are numerous hurdles to loan workouts, not the least of which is that some borrowers may simply have bought houses they couldn't afford no matter the terms of their loan.

 

Still, given the scale of the crisis, a piecemeal approach to restructuring mortgages may not be enough. Millions of homeowners could end up in trouble in a deep recession, because they bought houses during a decade when prices essentially doubled even as incomes were flat. Now, prices are moving back into their historic relationship with rents, which will leave many borrowers owing more than their houses are worth. It's tough to devise a housing rescue plan in large part because there's no consensus on how the burden of falling house prices should be shared. Should lenders and investors have to take substantial losses, as envisioned in, for instance, the FHA Secure refinancing plan that was enacted earlier this year? Or should the government consider an approach that would guarantee mortgage payments across the board, and then leave taxpayers on the hook for losses taken in any mortgage restructurings?

  Either way, there's more pain ahead for both lenders and homeowners. Even after the declines of recent years, the cost of buying a house in many areas remains well above the price of a comparable rental.

Which way all this is going to go the time will show.

Emerging Real Estate Markets Nationwide

Where are some of the emerging real estate markets located? What makes these markets "Bubble Proof"? Please post your thoughts and insights.

Wholesale Real Estate Deals

Wholesaling Properties has become a lucaritive business. Please share your success and failure stories with other investors.

Is Prosperity Pure Luck?

I have always wondered why some folks are born with the "midas touch" while most struggle all life to make ends meet. Is it a pure coincidence or is there a higher power working on our case? What do you think?