How Will the Bailout Affect US Real Estate Investors?
September 27, 2008 
7 Comments
Hey everyone, it’s Kevin.
There is a lot of buzz about this bailout proposed by the Bush administration. A few nights ago the president addressed the nation in what sounded like a plea to Congress. He and his advisers are absolutely convinced this nation needs a bailout… and I agree.
From what I have seen, some of the important details are:
- $700 billion in tax payer money to buy bad mortgage backed securities (MBS)
- Limits on the amount of CEO income from the banks bailed out
- “Cramdowns” – this is would allow bankruptcy judges to reduce the amount of debt a borrower owes to a lender.
Let’s break this down.
$700 billion is a lot and it sounds VERY scary to hear the President say this will be tax payer money “at risk”. I, however, look at this as a very smart investment by the government. MBS are under valued right now because of consumer confidence. Past investors of MBS are putting their money in other areas because of the doom and gloom spreading across the world. This is causing the values to plummet. Once confidence in our market is restored the values of these securities will increase.
The fact is, most loans are still good loans. About 1% of loans purchased by Fannie Mae or Freddie Mac (the two largest purchasers of mortgages) are consider seriously delinquent. A serious delinquent loan is 90 days or more past due. Keep in mind that Fannie Mae and Freddie Mac did not buy subprime loans so their defaults are expected to be lower than what some of the big Wall Street banks have, but they are still a good overall indication of what is out there.
Warren Buffet said yesterday that the US Government is the only one that is patient enough and strong enough to buy these securities and he believes the government stands to actually make money from this bailout. In fact he is so confident in this bailout that he invested $5 billion into a financial company. I don’t know about you but I listen when Mr. Buffet talks so I am really not concerned about our tax payer dollars.
I hear the argument that it is not fair to bailout banks that made bad decisions. Its not fair that the CEO’s stand to make millions while stock holders lose their shirts. Not knowing the details of the plan I can tell you that every attempt to limit CEO income will take place for any bank participating in the bailout. I also wonder why people think these banks are getting off scot-free.
Part of the bailout plan is to reduce loan amounts for troubled homeowners with the “cramdowns”. We might not think it is fair for the government to buy bad debt from some of these lenders but those same lenders will say it is not fair for a judge to say the borrower does not need to pay back the money they borrowed.
I really like the idea of a bailout. Lack of liquidity is damaging our economy to the extent that we will go into a long and painful recession. I was not alive but I get the impression that this has or soon will have the same feel as the Great Depression. Rates on Treasuries (the safest investment you can get) are near all time lows. It almost does not make sense to even invest in them. Many people considering the ultra safe investment might as well stick cash under their mattress.
The bottom line is by the government buying this debt we should see some more liquidity in the mortgage markets. The idea is more liquidity will loosen guidelines creating more buyers for property (and making it easier for us investors) so values will increases and the entire economy can head for a recovery.
Please post your comments – “What do you think about the bailout plan?”
Well said? Great information, keep up the great work!
I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog.
Tim Ramsey
The bailout is Horrific, but unfortunately, probably our best option. That being said, here’s the conditions I’d like to see applied:
1) Everyone that borrowed too much for a home they couldn’t afford and are facing foreclosure, should lose their home and live in an apartment or rent house for at least 2 years to consider the consequences of their self centered, foolish decision and what it is going to cost those of us who only bought the house we could afford.
2) Everyone who approved a loan that they knew was excessive for the mortgage applicants should be fired, fined and and imprisoned.
3) Barney Frank and his band of miscreants in Washington who pressured lending institutions to engage in social engineering and lend to those who couln’t afford it, should be bullwhipped, fined, impeached and imprisoned.
I’m a little confused…..?
In one email from your wife, (Editor’s Note: Kevin works for me – he’s not married to me.–Susan) she is promoting “portfolio loans” as a way to forever forget about the need for Fan/Fred, I click on this blog and here’s an article about why a bail out is a good thing! Huh?
I was SOOO happy to see the bill not pass today, what a complete crock! Lets see, bad people do wrong things to good people. Good people don’t seem to have enough sense to know they can’t afford a $3K a month house payment, yet jump on the bandwagon and you are applauding the epitome of a social service if I ever heard one!
There’s a song with a partial line…….”let the mutha f**ka burn” (forget the artist off hand) and I think that applies here! The banks, lenders and “investment” houses (Merril, JP Morgan etc…) should all loose whatever it is they have in this game. The people that took these loans and, as some I’ve heard, never made even a payment, should loose the house to the auction markets, let them pay for their ill deeds in the form of recaptured “income” taxes on the short sale.
The good people that actually did get caught in the middle WILL work out their issues with lenders etc, have probably continued to make payments and will do whats right in the end.
The rest desrve whatever they get, and I’ll be damned if I’m going to pay for someone else’s screw ups! I’ve worked hard to put my rental portfolio together over the years and have always done the right thing, why should I pay to bail these idiots out? Where’s my ROI on that deal?
I’m real disappointed to read that you support this bail out Kevin.
Thank you to everyone that posted comments. I love to hear what our clients and readers feel. In response to Chris, what Susan is teaching with portfolio loans is brilliant. This is absolutely one solution to some of our specific issues. What I am referring to with the bailout is the impact on the economy.
I understand the position of being opposed to the bailout. In fact, MANY top economists feel the same. I don’t necessarily like the fact that many companies that made bad decisions stand to benefit but what is worse is the alternative. The lack of confidence and liquidity in the free market has caused and is causing: loss of jobs, lack of free flowing money, decrease value of investments and the inability to get loans for cars, houses, school, medical bills and more. $700 billion in tax payer’s money is less than the trillion dollars of losses people took yesterday and the $700 billion will buy assets that should and could appreciate. Yes many will go bad but many wont and there is a high probability that the tax payers money will be repaid in full. In fact the proposal that was denied yesterday was going to give any profit made back to the tax payers. I guess what I am trying to say is that the taxpayer will indirectly benefit from a bailout with a stronger economy and stability in the markets.
Maybe the solution would be for FHA to start making loans to investors and increasing the number of loans a person can have. Taking buying power away from investors like us is clogging the overall housing market. If the government can find a way to use tax payer’s money to make “good” loans maybe the bad companies will fail and we will see new banks come into the market. Or will this kind of lending monopoly keep competition out?
Let me start by saying ……..Ooops
Sorry for the assumption that you two were married, not sure where I got that. My apologies.
Well now we’ve seen business as usual by our brilliant leaders. How much pork and favors got entered into that bailout bill that passed?
Kevin, in response. Jobs always get lost and gained, markets always slow and rebound, thats a cyclical economy. When have we ever seen the government come in and “fix” anything? Look to the recent airline bailout……..what did that help?
People (corporate and private) that made bad decisions (knowingly and otherwise) are going to get a pass on stupidity and at your and my expense.
My wife told me yesterday that she heard something along the lines of loans being re-capitalized based on the current value of a home. So someone who should never have bought a half million dollar house, may get a free pass to keep it at a much reduced property value and a loan to match (hey maybe even more appropriate to their afford ability level!!). But me the guy who (along with countless other investors) has done the right thing, kept his loans low and paid for doesn’t get anything but a tax burden to pay for all the wrong doers. Just absolutely ridiculous! Let the markets take a hit (crash if you will), let all that we know in a capitalist society, reset. Let the world markets follow how they may. Hopefully you would see the basic “survival of the fit-est” come forth and weed out alot of those who caused all these problems.
And there are some that wonder why people don’t want to or like to pay taxes………….gee, you think?
Barney Frank is not only a coward, as O’Reilly said, but a lying coward. He actually denied what he said on the newsclip that was played at the beginning of the interview. What a loathesome loser.
He is the poster child for why America’s approval ratings of Congress are only half as good as Bush’s lowly ratings.
I am very sceptical that if the $700B averts depression, that the fire sale assets the gov will be buying with our money will ever be returned to the tax payers as a profit. Fat chance.
And the CEO of Lehman speaks before Congress and tells them their board carefully examined the executive pay of the company to make sure it was in line with shareholder expectations!!!! What a joke! He was paid over $300m while presiding over a company that went belly up and took shareholder money with it.
On the optimistic side, there will probably be tremendous opportunity for the real estate investor to pick up bargains from the overleveredged masses. Bad news; you’ll probably need CASH to pick them up, since lending will be so tight.