If this is done like the RTC bailouts, this new government entity would take over the bad debts, turn them into REOs, and sell them as packages. I posted a
description of the RTC process in another post. They did a total of 17 packages ranging from about $1B to $116M. However, unlike banks just selling REOs or bulk REO packages (if that actually happens), the RTC retained an equity interest in the properties. So, when they were sold the RTC received a cut of the profits. About half, if I'm understanding correctly. While that would reduce the possible returns for folks like us, it allows the feds to recover some of their investment.
If I could buy a REO from a bank, have the bank retain an interest, and have the bank provide financing, which the RTC did, I would certainly be interested. Its no different than any other equity partner in a deal.
Frankly, no, I don't think its "fair" to just adjust everyone's loans. The current plans may be flawed, but I think the concept is valid. Help people who have the ability to retain their homes keep them. And, yes, have the government keep some interest in those properties. Individuals shouldn't be able to get bailed out, then turn around a pocket all the profit no more than big corps. (And, the heads of FM and FM should be in PRISON, not collecting fat golden parachutes.)
People who have no ability to pay for their properties, even with assistance, should lose them and move on. If they don't have the ability to keep them, pumping money into those deals is a band-aid-on-a-bullet-wound approach. It just wastes a band-aid that might actually help someone else. And, yes, I do realize I'm talking about real families being put out of their houses.
People who are in a position to make their payments should not receive assistance either. That's just a flat out gift from the government. Which means its coming from you and me. Or, more likely, our children.
The real crux of the government actions is to try to unstick the bound up credit markets. The falling housing prices are an effect of the changes in the credit market, just like the dramatic and unprecedented runup in prices what a direct consequence of an extremely liberal lending environment. There's still a lot of air in that bubble in many places, so still lots of falling to do. The government is NOT going to be able to stop that. They might, just might, keep prices from completely tanking, and falling way below the long term trend. If you look at the
long term Case-Shiller data, you'll see that's exactly what happened after WWI. Prices went from one trend line to a lower trend line. It wasn't until post WWII that prices shifted back to a higher trend. Had the lending environment remained loose, we would have settled to some new, higher long term trend line. Appreciation would have gone back to the long term, inflation driven trend, with the 5-7 year cycles the veteran investors describe. But, we now see that environment was false and unsustainable. So, now we need to get back to something more the pre-bubble times.
(I would like to find a more up-to-date version of that graphic. The peak of that graph was 206.52 in July 2006. The most recent value is 167.69 as of June 2008. That's a 19% drop. However, if you say 110 is the baseline we're headed back to, then we still have a long ways to go.)
Trouble is, all the people with money have it tied up in investments that have much lower values than they though. So, there's really much less money floating around in the system than we all thought. People who's houses are worth less than than they were are just the tip of the iceberg. In reality, people, towns, and countries who bought into this bubble thought they had $5B in the "bank", but now find they have only $2B. So, they're very protective of their remaining money, just like you would be, and like many people were after the dot com crash.
If nobody is willing to make any loans, we'll be back to the post-WWI lending environment. We won't settle back to 110 on that graph, we'll be back to 70. That will be a 65% fall from the peak of the bubble, and a 35% fall from pre-bubble prices. There will be very few sales of properties because most people can't get a loan at all. Those who can will need to save up 20%, 30% or more for a down payment, and have excellent credit and very low DTIs. Lenders will demand high rates. Prices will fall dramatically. That house I sold in Bakersfield in 1999 for $240K, and that went up to $600K in the bubble will fall back to $240K. Or, $200K. And factoring in inflation, it will only be worth $160K in 1999 dollars.
So, I really dislike this whole bailout. I really, really dislike that executives of these big companies are going to walk away with big bonuses and the worker bees will end up with their pensions and investments devastated. Just like all the Enron employees. But, I don't see an alternative to some sort of bailout.
