Bailout question . . .

[QC]

Before I ask my question . . . please do not turn this into a political issue. I have a legitimate (maybe stupid) question and I want to discuss this from a marketing/what if/what's possible type perspective. I do not care if you like/hate the bailout or like/hate banks or like/hate stupid people!!!!!! Thank you

OK, so let's assume a couple of things:

1) The US Government effectively buys some shaky home loans from lenders that are on a somewhat shaky footing. $700B or $700 it doesn't matter

2) They pay 50% of those loan "values" or balance for those loans, AKA "50 cents on the dollar". Yes I know it is maybe 60 cents, but that doesn't matter for this question and 50 cents makes the math easier.

3) That the US backing or US holding of these loans would still mean that someone is responsible to pay them back.

OK, so with those assumptions in mind, here is the scenario for my question.

Let's say that Joe Blow Borrower has a $100K balance on a home mortgage. And let's say his home is worth $75K. And let's assume that the $100K mortgage payments are breaking his budget. Joe is otherwise a good guy, but he is in over his head. He is underwater and he simply cannot make the payment. He is considering bankruptcy, but he hates that idea, but it is probably best for his family etc. However, he could afford a 30 year amortized payment on a $50K loan.

So why couldn't the US Government "buy" that loan for $50K (50 cents on the $100K dollar). And then somebody calls up Joe and says, "listen dude, Uncle Sam loves you. We want to help, and we want to make sure that our good taxpayers get their money back at the same time. So we want to offer you a new loan at $50K, your payment will be X. Can you swing that?" And in this example Ole Joe says, "heck yeah!! Hallelujah!! I am whole again, and my family will be able to keep our home and how the heck did this miracle happen, and thank you, thank you, thank you."

And in fact the US taxpayer IS whole, and Joe is happy, and the company who got 50 cents on the dollar did get hurt and then the US "sells" that loan back to a stronger lender but still backs it . . .

I would think a lending institution would gladly loan him $50K if the US Government would "guarantee" that Joe will pay it back. Who is the loser here? What am I missing?

 

[tashasdaddy]

Re: Bailout question . . .

i totally agree, having been a real estate broker also, if these mortgage companies that are in trouble, would have gotten with their investors, and said, we are going to get stuck with these. let's just roll back the interest rate, this way the home owner would atleast be paying his principal back, and a small amount of interest. mortagee greed. i refused 25 years ago, to allow a buyer to purchase a house with an ARM. it was a bad deal then, and still is.

 

[NelsonQ]

Re: Bailout question . . .

Did they just announce 1/4 - 1/3 percent increase on 1,3 and 5 year mortgage terms last night/this morning? I guess they're not as concerned. I would of assumed that this would push for lower rates.

 

[ehenry]

Re: Bailout question . . .

I like this guys idea.

http://viviangrant.wordpress.com/2008/09/25/the-birk-economic-recovery-plan/

 

[JustJason]

Re: Bailout question . . .

I'm still confused on the whole deal. Hopefully somebody can educate me.

Lets say Joe shmo took out a 200k morgage on house valued at 200k.
Lets say Joe has paid 50K off over the years, leaving him with 150K to pay on his 200K house.
Now his house value went down, and it's only worth 150k.
Joe still has to pay what he morgaged, a full 200k. Regardless of the value of the house.
Lets say Joe has come into trouble, (for whatever reason, doesn't have to be the loan type) and can no longer afford his house. Joe is evicted, and has essentially paid 50K in rent to the bank.

The bank owns the house untill the morgage is paid off, correct? (question 1).

So if this same scenario is happening all over the county, there are hundreds of thousands of houses that are empty and partially paid off, but the bank still ownes the houses, correct? (question 2)

So now the bank is out of money, because they over loaned themselves out of money, but they DO own houses, correct? (question 3)
they either can't sell because there are no buyers, or won't sell because they choose not to take a loss on the original morgage, and they'd rather cry about having no money rather than taking what they can get for the house, correct? (question 4)

So I don't get it, what are we buying with 700 billion dollars? Are we paying the difference between what the bank has recieved in payment on the the loan, and the amount the loan was originally made for? (question 5) Or some percentage less.....

And I guess this in my most important question. Who gets to keep the houses in the end? Joe Shmo is still evicted. Are we paying a portion of these morgages off, and the bank still has the house to sell in the end? (which would be flat out robbery in my eyes)
Or, is the govt taking the deeds to these houses whose morgages we pay off, only to hope the values go up and selling the houses again back to ordinary folk, with the money going back either to the taxpayers, or into the taxpayers general fund. Are we going to see "for sale by uncle sam" signs up on vacant properties? (which in my eyes wouldn't be so bad)

so who gets the houses?

 

[QC]

Re: Bailout question . . .

Jason, too many bad loans means too many undervalued homes, means bank can keep on selling homes until they go out of business because they are losing on each deal . . .

My understanding of the bailout is that we buy "bad loans" at 60 cents on the dollar, bank eats 40 cents and loses the title to the house. That would make us (US Taxpayer) the title holder. Then we either get the payments back to us (US Government in lending biz) or we "sell" those loans at 60+ cents back to lending institutions and we get most, if not all or more of our money back. I am not sure why this is so hard to swallow and/or do? With the exception of the US Government becoming a housing bank, which I do not like . . . But it is probably necessary and an example of what government is for. Fixing stuff that we/they mess up when it is absolutely necessary.

 

[slia67]

Re: Bailout question . . .

The loans that the government is buying are priced for pennies on the dollar. When the market for these securities dried up earlier this year, so did the value of the investments. Even if only 20% of the loans default, because the market is so thin teh market value has to be marked down to 10-20% of their original value. Think - If you had a bushel of apples and everybody wanted one, you could charge $1 a piece for them. But if everybody got scared because some worms were found in the apples and nobody wants your apples anymore, you may have to mark the price down to 10-20 cents each. Even though only 20% of your apples may have a problem.

Consider these facts: what if 50% of the suspect houses do in fact go into foreclosure, all of these houses are at 100% loan to value; and the bank sells the house for 50% of the homes value at auction. Using $100k houses as a simple example, and $1 mill worth of loans, here is the math.

$1,000,000 bought by the government for 20 cents on the dollar = $200,000
50% of the $1MM goes into foreclosure = $500,000
bank sells the $500k worth of houses for $250k (50 cents on dollar @ auction)
$500k (non-foreclosed houses) + $250k (auction proceeds) = $750,000
$750k on a $200k dollar investment is a heck of a return for the government
These returns are picked up thru stock in exchange for the loans, by the way.

But even if the government was to come out even on the deal, the economy is helped and the politicans get to boost about how they helped "save the country."

 

[QC]

Re: Bailout question . . .

Agree ^^^, again who is the loser? The original banks who should be right? Could you apply your understadnign to my question above? Would that not also make some sense, save Joe in the process?

 

[Limited-Time]

Re: Bailout question . . .

captJason,

1) yes the banks or holding company's "own" the houses.

2) Correct

3) The banks is out of money not because they "loaned all of theirs out". The banks cannot pay their creditors because the home owners cannot pay them. Hence the banks have "no money". But they still own the houses.

4) If the homes sell for less then the banks owes its creditors, the bank cannot make good on its debts any more than the original owner could.

Additionally, if you owed 100K on your mortgage, and defaulted to the bank. The bank foerclosed
on your home and sold it for 75K, the current market value. You would still owe the bank 25k for the house you no longer owned.

It gets freek'n UGLY fast when things go south.

 

[Vlad D Impeller]

Re: Bailout question . . .

QC, what you suggest seems more to be a "rescue plan" not a "bail-out", it would be terrific if the peoples interests prevail and not partisan rancor.

How is Caterpillar doing with their credit requirements?

 

[JB]

Re: Bailout question . . .

The notion of renegotiating mortgages. . . principal and interest. . . is very attractive but:

Why is the home "owner" in trouble? Is it because he gambled that he would be able to sell or refinance at a higher value or that his income would go up before the rate adjusted to something he cannot pay? He does not have my sympathy any more than the jerk bank who gave an ARM to somebody that had a poor chance of paying it. Both were doing high risk gambling and I am not interested in paying anyone's gambling losses.

Or is the home "owner" not in trouble at all, but "upside down" because he owes more than the current market value of the home and has decided to just walk out on it. I have even less sympathy for him. A deadbeat is a deadbeat.

I do not like the idea of rescuing either of the above guys, but I can tolerate the idea of buying up illiquid loans and mortgages to put about half of the capital back into the credit market. Some of those loans will be paid back. . . more than we taxpayers paid for them. . .and some will default and we taxpayers will have to settle for what we get for the collateral. The rest will be sold back into a stabilized credit market at, or above, what we paid for them.

If the bean counters in DC correctly estimate the ratio and correctly set the price we pay for the loans then it will be a wash. . . we taxpayers will not be out a dime. If they miss, we will either lose some bux or make a modest profit.

The main thing is that we must do it now, before it gets so bad it cannot be rescued.

 

[skargo]

Re: Bailout question . . .

I like this guys idea.

http://viviangrant.wordpress.com/2008/09/25/the-birk-economic-recovery-plan/

Ummm, do the math, it comes to $425 a person. Gotta love chain emails

 

[JB]

Re: Bailout question . . .

Ummm, do the math, it comes to $425 a person. Gotta love chain emails

Stupid, greedy, naive idea.

1. It gives away the money instead of investing it in the credit market where it can keep our economy running.

2. 90% of the business in this country would be shut down in a week. All business runs on credit. Take away the credit and there is no business.

3. What good is money gonna do if there is nothing to buy?

 

[skargo]

Re: Bailout question . . .

Stupid, greedy, naive idea.

1. It gives away the money instead of investing it in the credit market where it can keep our economy running.

2. 90% of the business in this country would be shut down in a week. All business runs on credit. Take away the credit and there is no business.

3. What good is money gonna do if there is nothing to buy?

I absolutely agree it's a nonsensical idea. I was just pointing out the math is totally wrong.

 

[Knot Waiting]

Re: Bailout question . . .

I disagree. If one guy cant make his payments why should we all (as taxpayers) be responsible for him while many others are able to pull it together? If ya bite off more than you can chew you can choke on it. Just like everyone else who made mistakes in the past had to do.

 

[RubberFrog]

Re: Bailout question . . .

JB is pretty right on with his posts in here.

 

[CBC]

Re: Bailout question . . .

TSK!TSK! nothing political please.

I?d also hate to see 20% of the bailout money go to Acorn!!!

 

[QC]

Re: Bailout question . . .

QC, what you suggest seems more to be a "rescue plan" not a "bail-out", it would be terrific if the peoples interests prevail and not partisan rancor.

This is like any other thread I guess. Seems to me that only Vlad is answering my question. I guess I have two points:

1) It seems like we could "bail-out" the banks and "rescue" Joe

2) And we could do #1 without hurting taxpayers in the long run . . . .

Or we could just let the banks go under as Knot's Landing is actually suggesting . . . If Joe eats it the banks go down . . . Great plan

 

[tommays]

Re: Bailout question . . .

We have all been raised with the idea that home ownership is the american dream


And with all the tax breaks you get it has allways been funded but the tax payers to some extent as JOE apartment is helping JOE homeowner as he does not get a tax break

 

[QC]

Re: Bailout question . . .

OK, now that I was prompted by Frogger, I agree, JBs comments are consistent with my understanding. I guess I didn't read completely either :redface: