The Bail Out and Charlotte
Posted September 24, 2008
Is the proposed Bail-out Plan good or bad for America?
Locally, we also wonder if this is good or bad for the Charlotte mortgage and real estate markets?
First let’s understand the problem and need for this plan. I think there is a lot of confusion right now about who needs help, why they need it and who stands to gain from this plan. I don’t profess to have all of this mess figured out but I can give a simple overview that might help the average homeowner understand what’s going on…
Banks are in trouble and if Banks are short on money they can’t lend money to the people who need it. (home buyers, business start ups, etc…) Banks are short on money because of too many bad loans. Let me explain…
Banks lend money to home buyers to purchase a home. The banks get their money back to continue lending by packaging the loan into a bond and selling it to investors. The bond is guaranteed so even if the homeowner doesn’t make their payments the bond has to honored so in reality even though the bank got their money back to continue lending they are still on the hook for bad loans. Foreclosed properties take time to sell, so if you have enough of them out there it can tie up the banks’ money and cause a big problem. Even worse, since this credit crisis has become so well publicized investors stopped buying the bonds for the bad loan products a long time ago, so the banks with huge amounts of money tied up in these risky loans just have them sitting there on their books and can’t get their money back to keep lending.
KEY - If banks don’t have money to lend, they can’t grow or make new profits and eventually will fold. NO CASH = NO BANKS = NO LOANS = GREAT DEPRESSION! (we all would prefer to avoid this one!!)
Here is a practical example of how the bail-out can work…
“MEGA-BANK” has $40 Billion in bad loans. The U.S. Government would pay them a certain discounted value to buy these bad loans. Let’s say it is 65 cents on the dollar so to buy $40 Billion in loans the government only pays $26 Billion. The government then can take its time with selling the loans, selling the foreclosed homes, collecting the payments, etc… The U.S. can even realize a profit on this deal if the right price is paid upfront. “Mega Bank” writes down a loss of $14 Billion but frees up $26 Billion is cold hard cash! This can at least get some of the biggest banks back in the game, lending money and doing business.
Bill Gross, head of PIMCO (runs largest bond fund on earth), stated today on CNBC that according to his numbers the U.S. could end up making 6-8% profit on every dollar spent! He said these numbers were conservative. Bank in the 1980’s, the government stepped in to solve the savings and loan crisis and ended up making money in the end. This would be similar except that in this case the government is not taking over debts but buying them. The upfront price is the key to the U.S. taxpayer making or losing money on this deal long term.
Will this plan solve the problem? No one knows the answer to that question over the long term. There is a careful balance when it comes to credit. Make getting a loan too hard, and the economy can shrink fast. Make loans too easy (like what has happened here) and the whole credit system can fail. We have to ensure the health of the lending system so there are banks to lend, but credit must be available at a reasonable level for homes and cars to sell. This plan can and will get money flowing again, and at least for the short term that is a big win for the economy and the housing market!
This article written and submitted by Olan Carder
Additional thought: This will have an impact on the Charlotte mortgage and real estate markets. While we have seen a slow down in some areas, the Charlotte real estate market is still the strongest in the country. Now is the time to take advantage of low Charlotte mortgage rates and high Charlotte real estate inventory!
This website provides information on FHA and VA loans, in addition to the hundreds of other conventional and jumbo mortgage loans available. As a mortgage loan officer, Ed has proudly served home owners and home buyers in the Charlotte area (including Concord, Gastonia, Matthews, Monroe, Huntersville and Ft. Mill as well as all of North and South Carolina.)
Apply online for your Charlotte area mortgage loan
or call 704-651-8704 for your free mortgage consultation.
Related Articles
Posted in Commentary
