According to the AP, Treasury Secretary Timothy Geithner is set to give a major speech on Monday to outline the $700 billion rescue plan.

As a part of any bailout package we’ll see, the government will certainly make some major moves in the real estate and banking space.

Meanwhile, real estate lobbyists were pressing the government to spend billions to temporarily subsidize lower mortgage rates. They were looking to Geithner’s announcement Monday in hopes that some of the financial rescue money would be used to reduce mortgage rates and prevent foreclosures.

The Federal Reserve has been buying up mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae for a month. Before rising a bit in recent weeks, mortgage rates had plunged since the Fed announced the creation of the $500 billion program late last year . . . Geithner said the overhaul of the rescue program was aimed at improving the effort to get credit flowing again and to support the Obama stimulus plan being debated in Congress.

Some Questions:

• What will happen to the lending environment if private lenders are forced to set rates according to government regulations?
• How will they “convince” banks to loosen credit and lend in the current environment?

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Tags: $700 billion, bailout, Credit, Geithner, lending

I have written here on BiggerPockets extensively on the complete lopsidedness of the banking bailout and how the preference was given early on to helping Wall Street fat-cats over Main Street foreclosure victims. The bailout bill created the Trouble Asset Relief Program (TARP), funded it with $750 Billion of which about $350 Billion still remain in the hands of Barney Frank, the House Financial Services Committee and their Senate counterparts. The first allocation of the assistance or about $300 Billion, focused clearly on the banks or bank holding companies to get and keep them solvent.

Flawed Legislation Pushed by a Deeply Flawed Congress

This was all done by Congress in hurry to stave of a “banking crisis”…a crisis that never occurred. After TARP spending topped out so far at $350 Billion, is now deemed to be a rather poor performer…leaving most in Congress and the public to believe (rightly in my opinion) there was never a crisis in the first place.

Further more, the banks once in receipt of this enormous amount of money did absolutely nothing with it that the public and Congress expected…i.e. loosen a frozen credit market and start lending again. Instead they opted to horde the money or pay executive bonuses. This cavalier banking industry attitude lends further to they belief there was never a “crisis” and therefore, should never have been given a taxpayer funded bail out.

TARP Rescued by Barney Frank? Don’t Bet on It!

One of the most outspoken critics of the TARP (even though he was instrumental in getting it passed) for it’s clear lack of help for foreclosure victims, was Barney Frank, the Chairman of the House Financial Services Committee. TARP was passed with very little Congressional oversight which was one of the flaws which allowed Treasury Secretary Paulson to blow the first half of the TARP funds getting nothing for it. The only real oversight was the provision the Treasury would have to come back to Congress for authorization on the second half of the appropriated funds or about $350 Billion.

Now the ball is back in Barney Frank’s court…he could correct the shortfalls he complained about initially. Now Frank has more time and a like-minded “look out for the little guy” Obama administration, so he could show us just how much he really cares about home owners in trouble by mandating the remainder of TARP will be used to help foreclosure victims.

Did he do that?

Of course not!

The legislation to help home owners Mr. Frank proposed today allocated only $50 Billion of the remaining $350 Billion…less than 15% of the money left!

Like all legislation, if they don’t fund it, they might as well not pass it.

This $50 billion is a pittance compared to the “useless” money thrown at the banks and AIG… and it’s now clear to me the Obama-Frank combo is going to be just as callous to troubled home owners as the Bush-Paulson duo.

Did you really expect anything to change?

Silly rabbit, tricks are for kids!

Tags: $700 billion, bailout, bank crisis, banking, barney frank, housing, TARP

So just in case you’ve been living in a cave this week, Congress is struggling to figure out how to bailout the big three automakers. The House passed a bill which died in the Senate late Thursday night. The reports of the bill’s demise reached the White House where it was rumored the Treasury Secretary would be ordered to fund the bailout with monies under the TARP program.

TARP Money For Detroit

The initial TARP allocation was $350 Billion and Neil Kashkari was told this week by Barney Frank he wasn’t getting the second disbursement until Treasury forced mortgage servicers to modify defaulted loans en mass.

So this mean Hank and Neil are going to have to tally up how much they’ve spent and see if any is left.

If there is a few billion left, is it legal for Hank to use TARP funds to bail out non-banking institutions?

Well, first the bailout bill was written with such wide-reaching powers for the Secretary, he can do virtually anything he wants.

However, what most folks don’t know is all three automakers have significant financial service companies. For example, Ford has Ford Motor Credit. GM owns GMAC Financial, a huge financing company that operates lending divisions including the cable TV advertiser, Ditech Mortgage.

Just a few years back, GM made $1 Billion in a single year from just their mortgage lending, both commercial and residential, which just so happened to match the revenue that same year as their auto sales divisions.

Who would have ever guessed that GM could generate the same amount of revenues from mortgage lending as they did from building and selling cars?

GM is still in bed with Cerberus Capital Management as the major shareholder in GMAC and owns Chrysler. Cerberus is pushing for TARP funds as they started floating their option of putting GMAC in bankruptcy if they don’t get bondholders to agree to an exchange to raise the capital needed to qualify as a bank holding company.

(Supposedly Cerberus believes Hank can’t use TARP to bailout non-bank companies or “unqualified” bank holding companies….or they are just using this crisis as leverage to skin their bondholders…you be the judge.)

Either way, it was clear that the smart money for an automaker bailout would be on the Bush Administration and their man, Hank to solve the problem…not Congress.

And Maybe He Should

Originally I was siding with the Senate Republican’s who have simply had enough of poorly run car companies and championed their efforts to kill the bailout.

However, the more I looked into the “banking” tentacles the automakers have, the rationale for the original banking bailout holds true for the automakers…since the modern automaker is not so much automaker as auto, dealership, and real estate financier.

Dealbook.com reported it this way,

“Whatever happens at GMAC will ripple through the auto industry. The financing company provides loans to consumers for cars and to dealers for their inventories. General Motors, which retains a large stake in the financing company, said in its latest turnaround plan to Congress that it was counting on GMAC’s viability. Otherwise, G.M.’s financial problems, and its need for government assistance, could grow.

For G.M., any additional problems at the financing company would bring more pain for its dealers, who have long depended on GMAC to provide consumer financing and to carry its inventory. The automaker set up the unit in 1919 to help customers buy its cars.”

Dealers all over the country need GMAC to fund all those cars on the lots and they need access to those funds to help customers buy a new car too. Killing the bailout kills the financial arm of the automakers and subsequently, the dealerships. The bailout is to keep credit flowing and to keep the dealers in business. If we don’t keep the credit flowing, car buyers would be forced into the hands of the scared local banks.

That won’t work…

So, Hank go ahead and get out your check book…cut them a check for the $34 Billion Congress choked on.

You’ll be able find that small amount the cushions of the Treasury Department sofa, eh?

Tags: $700 billion, auto bailout, bailout, Economy, TARP

Every now and then, something comes along when I think to myself: Gosh (well, I would probably use a stronger word, but you get the drift), why didn’t I think of that??? I mean, I would have loved to have been the one to invent, say, the airplane, or television (maybe not television) or soft served ice cream, or an iPhone with a battery that could be replaced. But, sadly, I wasn’t. As the title of this article suggests (okay, says) I am about to tell you about a GREAT rescue plan for homeowners facing foreclosure. It is freaking (sorry for my language thoughts) awesome. It is simple. It is direct. It would probably work. And, I am afraid, it is also another one of those things I would have loved to have come up with. I didn’t.

This proposed plan comes via New York Times business columnist Joe Nocera. And, he, too, no doubt wishes he came up with this plan. He didn’t. He is quoting from a dude named Daniel Alpert, who the Times describes as “a founding partner of Westwood Capital, a small investment bank.” He is someone the Times has apparently turned to a number of times in the past for expert quotes.

Of this plan, says Nocera, “…a proposal came across my desk that I believe is so smart, and so sensible, that I hope our nation’s policy makers will give it a serious look.”

Okay already. What’s this great plan????
The plan is, a law would be passed that “encourages homeowners with impaired mortgages to forfeit the deed to their lenders but allows them to stay in the homes for five years, paying prevailing market rent,” says the Times article. In turn, says the article, quoting from the plan, “the lender would be forced to accept the deed, and the rent. After five years, the homeowner-turned renter would have the right to buy the home back, at fair market value, from the lender.”

The article goes on to talk about why this plan would be so good for the homeowner, the bank and the country.

Most important, it would create a sort of “time out” for five years during which homeowners would presumably get their financial cards in order, banks would be in better shape, and the global fiscal crisis upon us would have long been a distant and very bad memory.

As we have been saying here for some time, the Times article raises the key question: Now that we have “saved” Wall Street, isn’t it time to “save” Main Street?

The current mega bank bailout using all of our money only helps distressed homeowners indirectly, and, even that is questionable. So far, banks show little to no sign of coughing up more mortgage money and rates on fixed rate mortgages have gone up and not down in recent days. Doesn’t sound like a rescue plan for Main Street to me!

I agree with Joe Nocera that this proposed plan is far better than anything John McCain or Barack Obama or President Bush (well, okay, we can discount him right away) or the Congress has thus far come up with.

It makes sense. It would probably work. It is fair to all sides. And, sadly, that is why it probably doesn’t have a chance to be put into action.

Photo Credit: david.nikonvscanon

Tags: $700 billion, banking rescus, facing foreclosure, foreclosure, homeowner rescue

As we discussed last week, the banking bailout bill is helping mega-bank takeover artists like Wells Fargo, Bank of American and others. As I predicted last week, the Paulson plan to give these predatory banks a direct cash injection to continue their bargain hunting, this week went into full overdrive without a word of dissent from regulators, Congress, or consumer groups. Paulson announced the Treasury would take a “stake” in nine mega banks with $250 Billion. The government would get some warrants in exchange and share in the upside down the road.

People are incorrectly calling this move a “nationalizing” of the banking industry. It’s not. It’s simply a signal to the smaller banks who won’t get any subsidy, “Watch your back, Jack!”. Even though the TED spread dropped toward the end of the week, it was nothing to write home about. So the banks are still suffering from the same “ailments” we had last week, but the media spin is different.

Suffice it to say, those banks not hand-picked by Paulson, are getting squeezed by no liquidity in the capital markets and now will have a vulture looking over their shoulder for the next mis-step.

I learned something new about the TARP system Paulson initially said the $700 billion would be used for…the buying of “troubled assets” from the banks. TARP rules state a bank can’t “flip” bad loans to the government…buy them at a discount from one bank and resell to Paulson for a profit.

That’s a no-no…as it should be.

However, there’s a loophole!

If the bank obtained the bad loan through a merger, acquisition (read takeover), bought them out of a conservatorship (what typically happens when a bank is shut down by the FDIC) ….these TARP “unjust enrichment” rules do NOT apply!

If this isn’t the biggest motive in all the world to gobble up more banks…I don’t know what is!

Unbelievable…

The unmitigated greed these guys have…the nine banking moguls who met with Paulson this week just got handed the keys to the kingdom.

And we all sat here barely noticing…doing nothing…saying nothing…probably not even sure it was what was going on or if it was wrong.

Well, I’m here to tell you exactly what’s going on…and it’s not only wrong…it’s evil.

We will all pay the price for a consolidation of power in so few hands.

Mark my words.

Tags: $700 billion, bank takeover, banking, banks, conservatorship

Today, we’ve got an important guest post to share, written by Dan Gilbert, Chairman of Quicken Loans.

Last week, President Bush signed into law the hotly debated financial rescue package called the Emergency Economic Stabilization Act of 2008. While this legislation helps stabilize Wall Street and the banking system, it does nothing to address the root problems of the housing dilemma that is at the core of the financial crisis. High foreclosures, adjusting ARMS, rapidly falling property values and an oversupply of housing have combined to form a housing market “death spiral”.

Frankly, the $700 billion government bailout isn’t enough to solve the downward spiraling housing market. The country needs more. The current legislation does nothing to address the homeowner. Our nation’s financial recovery must begin at home with the homeowner. Enacting measures that keep homeowners in their homes is the only real way to stem our financial crisis. That’s where A Solution That Works comes in. I’ll summarize the main points of the plan here, but I truly hope that readers will visit the site (www.asolutionthatworks.com) to read the entire plan and give your input, or check out the Choose Thinking blog. Then, if you agree with the solution, please share it with your friends and family, and your representatives in Congress. This is something that will benefit millions of people.

So, here are the main points you’ll want to know about A Solution That Works…

THE PROBLEM:

• At the core of the financial crisis is the housing crisis, which needs to be addressed.
• Stabilizing Wall Street and the banking system is only a start. The current bill does not forestall the tide of foreclosures that are to come.
• Adjusting ARMS, high foreclosures, low property values and an oversupply of housings have combined to form a “death spiral” in the housing market
• The $700B bailout does not address this. That plan (i) doesn’t address how prices will be set for the loans (ii) causes unfair results for borrowers who have dutifully made their payments (iii) is potentially extremely expensive for the taxpayers (iv) will take a long time to have an impact (v) doesn’t address the root cause of the messed up housing market

THERE IS A SOLUTION THAT:

1. Keeps homeowners in their homes with fixed affordable amortizing monthly payments
2. Costs the tax payers a fraction of the cost
3. Stabilizes prices and stops free fall in home values
4. Gives investors higher odds of recovering their investment in these loans/securities vs. expensive foreclosure and resale in declining spiral of housing market

HOW:

• Focus on specific types of loans, each of which must be owner occupied: (i) ARMS with no caps (ii) Option Arms (iii) interest only loans.
• Require servicers of these loans to reset the borrower’s rate to 6.375% fixed with a 30 year term/amortization. But the borrower only pays 4.875%; thus, government pays/subsidizes the difference between 6.375% and 4.875%.
• Over the ensuing 6 years, gradually raise the rate the borrower pays and lower the amount of the government subsidy until year 6, when the borrower pays a rate of 6.375% for the remaining term of the loan.
• The lender/servicer has a one-time chance to write off any negative equity and receive two times the normal write-off
• All prepayment penalties on these loans are voided
• Homeowners get the benefit of lower payment for the first 5 years, and then a low fixed rate for the next 25. They get to keep their homes. Their homes values (and neighborhoods) stabilize.
• Lenders are in a much better position than if they had to forecloses on these borrowers, and the stability this brings to the housing market helps them with their REO’s
• Taxpayers receive benefit because this costs an estimated $50B spread over 5 years– a fraction (1/14th) of the cost of the $700B plan

Under this plan, everyone benefits. Homeowners with troubled mortgage loans (ARMS, OARMS and Interest Only) have a lower payment for the first 5 years, and then a low fixed rate for the next 25. They get to keep their homes. Homeowners who have been responsible in their mortgage choices and payments also experience a more indirect, but no less valuable benefit as their homes’ values and neighborhoods stabilize and eventually appreciate. Lenders find themselves in a much better position as well.

Implemented correctly, this plan would help rapidly stabilize the housing market. It would significantly reduce foreclosures, stabilize home prices and allow millions of American homeowners to work their way out of “upside down” financial situations that continue to perpetuate our downward spiral. And at a fraction of the $700 billion dollar cost.

If you think this sounds like a proposal you could get behind, check out the site asolutionthatworks.com or head to the blog http://choosethinking.com/ for more details.

For more media coverage about A Solution That Works, check out this article in the Detroit Free Press or this interview with WJR Radio in Detroit .

Tags: $700 billion, bailout, housing, loan, mortgage, Mortgages, option ARM loan

It’s soooooo old news, isn’t it? I mean, all that stuff about people not being able to pay their mortgages and the rising population of those facing foreclosure, is so old hat now.

What is really important, after all, is the survival of big banks! At least, it would seem that way from the news coverage of the last few days.

Asia stocks drop, says one headline. Britain to unveil major bank rescue package, says another. The U.S. stock market drops for 2nd, 3rd, 4th, 5th………day . Another bank wants to buy another bank. The Feds want to rescue another lending institution…..on and on it goes.

This is the big stuff. This is what the world really is all about.

But notice what is getting lost in the discussions: the homeowner and what will happen to him.

It’s not like they are not linked. We keep being told, in fact, that the world’s credit crunch will only be resolved when the housing market returns to normal, whatever the hell that means?

Really?

Then how is it that pretty much nothing is being done along those lines?

The much rushed socialized bailout to rescue big banks went out of its way to not include any language that would allow bankruptcy courts to change the terms of mortgages, something many experts say is vital to help the housing market recover.

The housing legislation that was passed earlier this year to help distressed homeowners is hardly off the ground, because it has no way to force banks to re-negotiate mortgages. In fact, with the government now waiting to buy these bum loans from the banks, why should they re-negotiate anything with homeowners? And, in point of fact, for the most part, they are not.

Backers of the bailout say that by buying up bad mortgages and mortgage related investments, the government itself will be able to change the terms of mortgages that are on the verge of default.

But anyone who understands anything at all about this crisis knows that a large part of the problem is, most mortgages are no longer owned by the bank that issued them…each mortgage has been divided and divided again and spread across many different investments owned by many different institutions. How can the government do anything with these mortgages when it is all but impossible to find out who exactly owns them?

Further, it is this very uncertainty that is fueling the crisis of confidence that is leading the world down the road to economic ruin.

And yet, I have zero doubt that things will improve…and sooner rather than later. This is NOT the 1930s when the government not only failed to act (before FDR anyway) but felt no need to do anything.

Unlike in the 30s, even the smallest country understands this is a credit-driven world. The system will be fixed to make credit flow again simply because there is no other choice and everyone understands this to be true.

Still, the $700 billion bailout is not the best way to do this. AIG already has reportedly zipped through lots of the taxpayer money pledged only a week or so ago. This will not ease the credit crisis for sure.

Those who say the economy will not recover till the housing market does are correct. But then the game plan needs to be focused directly and clearly on achieving that goal and not on helping one bank buy another.

Tags: $700 billion, bank crisis, banks, Credit, Economy, housing