U.S. BAILOUT APPROVED! For Home Buyers and Sellers - Will it Work? How Quickly?
LENDER CONFIDENCE IN MAKING LOANS MAY TAKE WEEKS TO RETURN!
If you watched any of the Cable News Channels yesterday, you didn't see much celebrating, back slapping, or Champagne cork popping after Congress passed and President Bush signed the $700 Billion Federal Bailout Plan.
The original bill, rejected by the U.S. House, was sweetened. Certain earmarks appealing to specific Members of Congress, and their Congressional Districts, and adding provisions for stronger oversight, limited executive pay for impacted companies, and an increased FDIC Insurance Limit may have helped the bill get approved.
But many questions remain. And these questions may take a long time to answer.
As we know, the bill's main focus is to allow the U.S. Government to purchase up to $700 Billion in non-performing mortgage assets held by banks and other lending institutions who made risky loans during the housing boom a couple of years ago. U.S. Treasury Secretary Henry Paulson, who has 45 days to derive a specific plans to purchase these bad mortgages, hopes that getting all this bad debt of the balance sheets of lenders will give them confidence to increase the amount of money they will lend to businesses and consumers alike.
The overall goal here - to unfreeze pent-up bank money to create new loans. In recent weeks, banks have been fearful of issuing loans due to uncertainty in the credit markets. Even bank-to-bank lending, generally considered the least risky for lenders, has been effectively frozen. Businesses have had difficulty even qualifying for short-term loans to pay for their daily operations. Loans for longer-term capital projects have been as tough to come by.
According to industry experts, including Joe Belew, President of the Consumer Bankers Association, don't expect lending to ramp up overnight, however. It may take weeks - or longer - for confidence to return. "Hopefully, this will lend a calming effect to the markets. We need to take a deep breath, relax and start doing business again."
How much will the U.S. Treasury Department pay for distressed mortgage assets? The answer to that question may take a long time to deliberate, and even longer to negotiate. Offering too much for the assets will over-tap the bailout fund, and might mean a smaller return when the government eventually sells the assets to investors, hopefully, at a profit, when credit markets eventually stabilize.
If they offer too little, lenders holding the weak mortgages may balk, and extend negotiations further. They may have to find additional ways to raise capital to improve their financial condition, and investment capital has been tough to come by in today's weakened economy.
Wall Street didn't jump for joy as the plan was approved. Last Friday, as the plan was being debated in the U.S. House, the Dow Industrial Average saw triple-digit gains. After approval, the Dow Index dropped 157 points, to close the day down 1.5% at the closing bell.
But the biggest source of Credit Market distress resides in the troubled Housing Market. Here in Chicago, and in many other areas of the U.S., foreclosures are at near-historic levels, and homes-for-sale inventory continues high - exceeding 14 months in many of the Chicago Neighborhoods and Suburban Communities we serve. Median prices have dropped nearly 10% here in the past year, and are likely to continue to fall.
At the same time, mortgage loan requirements have become much more stringent, allowing few but the most credit-qualified buyers, with high down payments, to buy a new home, or refinance their current one. Thus, the current Real Estate Buyer's Market has a nasty lining - many families who would love to buy a home now cannot obtain the financing to close the sale, and other buyers are waiting on the sidelines for home prices to drop even further before they act.
Until the Housing Market becomes more stable, according to experts, banks will be reluctant to lend, and the economy in general will not improve.
"This bill doesn't contain any element of stability for the housing market or the real economy," said Christian Menegatti, Lead Analyst for RGE Monitor, an economic research firm. "The problems are going to come back and the lack of confidence will come back."
Further, as long as businesses, and consumers, have doubts about quick economic recovery, they will be less likely to increase spending. One key indicator - Friday's Jobs Report, showing 159,000 job losses last month - does little to improve employee confidence. Those concerned about losing their jobs are not about to invest in a new home.
For these reasons, many feel the Federal Bailout will not, alone, solve the problem, and is unlikely to patch things immediately.
Said Adam Levitin, Associate Professor of Law at Georgetown University, "This is a tremendously expensive stopgap measure."
For more info, in an easy-to-read format, read Senior Writer Tami Luhby's article today via CNNMoney.com.
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