Current Events, News, Opinion



Unless you’ve been living under a rock recently, I’m sure you’re aware that the federal government is working on a massive bailout of Wall Street. This plan is intended finally to cure the financial markets of all problems related to the housing industry, mortgage-backed security issues in the secondary market, and restore confidence to an otherwise shell-shocked marketplace. Read more: CNN | Bloomberg | MarketWatch | The Wall Street Journal.

While the details of the plan are still being worked out, there are a number of things I believe that can be predicted with some amount of confidence:

The plan will cost the taxpayers much more than is currently being said. Treasury Secretary is currently predicting that the amount needed to bail out Wall Street will be in the “hundreds of billions” of dollars. Don’t believe it – it’s more than likely going to be much, much more.

The bailout, as currently being discussed in the major media, provides for the creation of a Resolution Trust Company-like entity. This entity, backed by the U.S. Government, would then take on all of the bad assets currently held by the financials – bad assets such as non-performing mortgages, depreciated REOs, and the secondary-market paperwork that accompanies them. In essence, the government bails out all the bad debts, the financials get a chance to wipe their slates clean, and everyone gets to move forward as if nothing ever happened.

The issue is this: for several years now, lenders have been doing everything they could to minimize these losses on their books. They’d shift them to Enron-like off-the-book entities. They’d change accounting rules so as not to recognize losses.

But now that the government is stepping in to back all of those bad debts with taxpayer money, you can expect every bad loan and potential loss will come out of the woodwork and be handed off to Uncle Sam. Think about it this way: if you had the opportunity to offload every potential bad debt onto someone else, wouldn’t you?

Hundreds of billions? My guess is that it will quickly escalate into the trillions of dollars.

The plan will not have any measurable impact on the day-to-day real estate industry. There’s a big difference between “on the ground” real estate and secondary market real estate. Stuff that’s on the ground are things like everyday home sales and mortgage loans. Secondary market stuff are all of the things that happen on Wall Street that are tied to those sales and loans: Mortgage backed securities, CDOs, tranches and so on.

While it is certainly true that the on-the-ground problems have led to the crisis on Wall Street, the current bailout plan does nothing to address the fundamental problems that are now systemic in the real estate market: there is still a glut of homes for sale, and it will not change. Foreclosures are skyrocketing, and it will not change. Home values are plummeting, and it will not change. Mortgage loans are difficult to come by for most, and it will not change.

In other words: the problems are too ingrained in the real estate market, and simply bailing out the lenders won’t make any difference whatsoever.

Again, think of it like this: the fuel of the real estate boom was the easy access to, and ready availability of, mortgage loans. Lenders made very imprudent choices in who they lent money to. Do you now expect them to go back to those very same lending guidelines that got us into the mess we’re in now?

To be sure, the bailout is intended to prevent a collapse of the financial system as a whole – but it will not be a curative panacea for all that presently ails the real estate market. Far from it.


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