Monday, September 29, 2008

Bailouts!

Prepare yourselves, I'm going to wax political, economical and poetic!  Ok, I can't rhyme, so I'm going to wax political and economical.

For those of you who don't know, I work as a Registered Paraplanner for a small investment management firm.  My job is very much like a paralegal to a lawyer, which means that I do a lot of economical research throughout the day.  To back all that up, my degree is also in Economics from the University of Utah.

Today was a bad day on wall street, the worst one-day point loss in history!  (Don't believe me, just look it up, there are plenty of resources)  It was down just less than 7% today.  This is not good news.  For the last few years I have been talking about the mortgage crisis, unethical lending and greedy behavior by banks looking for more money.  Don't get me wrong, this absolutely does not let the borrowers off the hook.  When hundreds of thousands of individuals took out loans, without knowing the terms, and never being 100% honest as to their ability to pay...WE all end up paying in the end.  Eventually a bailout package will pass through congress, but I believe, along with many, MANY others, that this is a good thing, although I would always prefer not to have to do it.  

In simple terms, the US Government is the only player big enough, with enough cash to buy up these assets.  They are NOT worthless mortgages, they will just take time to pay off.  In simple terms:  you have a family who purchased a home during the rise in the real estate prices, they took out a 3 year ARM (adjustable rate mortgage), two years into their loan, the real estate prices started to fall, so now this family has a mortgage for more than their home is worth.  Now comes the bad part, at the end of year 3 their ARM adjusts to a much higher rate, the value of the home has fallen and now the family cannot re-finance at a lower fixed-rate mortgage, and the family cannot afford the new "reset" mortgage payment.  The bank cannot afford NOT to "reset" the mortgage, because they have leveraged the mortgage to buy other assets and now the bank needs the money.  Two things can happen at this point:  1) The bank forecloses and sells the tangible asset, which means the family is out of their house and out of their equity.  The bank gets some money, but they have to take a loss.  2) The government steps in, buys the mortgage, does not "reset" the mortgage and the family is allowed to stay in their home and hopefully pay it off in 30 years at 100% of the mortgage value.

Now, obviously scenario #1 does not bode well for the individual or the "Main Streeters", but if we allow the government to step in and buy the troubled mortgages for a discount (possibly $.50 on the dollar) then the individuals have a chance to pay back the mortgages.  There is a bonus to this...the greedy banks get SCREWED!

Now anyone can read the various reasons why the bill did not pass today, and I'm sure some are right, but the Republicans AND Democrats who held their "yea" vote due to political reasons need to realize that they are responsible for todays historical loss!  Apparently the Republicans need somebody to talk nicely to them.

I'm not saying this bill was perfect, but it might be the only shot we have in the short-term.

OK folks, there is my take.  It's only mine, it is most certainly not the opinion of my employer, it most likely is not the main opinion of the man I will be voting for and not all of my friends would agree with me.  It's just my humble, EDUCATED opinion.

8 comments:

"The D" said...

I've been telling people this EXACT same thing for weeks!!

But no! Nobody listens to me.

Thanks for proving my point.

kel said...

Thank you. I'm kind of bad keeping up w/ all this, even though I try to watch the news and work at the same time. Keep me "posted" on the changes. Pun totally intended b/c I'm cheesy like that.

Princess Pointful said...

These are scary times... even for us, North of the border.

Nilsa S. said...

Yes yes yes! I'm hearing very similar sentiments to yours across the news sources.

kel said...

And BTW...in your expert opinion, what does this mean for me? I think I already told you, I bought in March 2006 in SoCal, right before the bubble burst. I have kind of accepted the fact that I may lose my home, but do you think there will be help for someome like me by the time I have to refi (March 2011)?

Helmey said...

I almost agree with everything you wrote. The only variation I offer is that Wall St is every bit as responsible (if not more) than the banks for the mess. Wall Streets former never ending appetite for mortgage backed securities and holding the proverbial carrot (high yields) in front of banks caused the banks to find more creative types of financing to feed the street. If they wouldn’t have offered to buy the crap especially at those margins the banks would not have offered those irresponsible types of loan products.

Hey Kelli there are programs out there called “FHA Secure” and “FHA Streamline” that you might need to hear about. I know your not talking to me but I’m just sayin’ that I’m almost as smart as the Slat City Miss…almost

Salt City Mistress said...

Helmey, you are absolutly right! I didn't want to get into Mortgage backed securites because "them is muddy waters" my dear Helmey!

Summer said...

Wow! I love reading the informed opinions of those much smarter than me! Thanks for sharing!