Newest bailout ramifications
I was just wondering, if the fed creates this vehicle for banks to unload bad debt. Would it not be a good idea for banks to thoroughly get as much bad debt off the books as possible?
There are various threads here where people postulate that banks are not allowing foreclosures because it allows the bank to retain the house on their books at the borrowed against price vs current market price.
If I understand the above two topics correctly, what are the chances that banks would want to start quickly changing their position on these issues? What would that do to the foreclosure/REO market if banks care significantly less?
Or am I way off?
There are various threads here where people postulate that banks are not allowing foreclosures because it allows the bank to retain the house on their books at the borrowed against price vs current market price.
If I understand the above two topics correctly, what are the chances that banks would want to start quickly changing their position on these issues? What would that do to the foreclosure/REO market if banks care significantly less?
Or am I way off?
Comments
It will be very interesting to see what the government does if they wind up taking ownership of most defaulted loans (and the underlying properties). Officials have been saying the government will hold these assets until they rise in value enough to be sold at a profit. This could be a VERY long time.
Does this mean the government will just keep millions of vacant homes on it's books for a decade or more? If they decided to rent them that would have negative implications for the market as well (i.e. driving down rental rates, which would hurt private land-lords and real-estate prices in general).
It almost seems as if the only solution is to just blow up all these defunct properties so that they are no longer hanging over the market like the grim reaper.
Maybe we should just build a black hole...
http://surkanstance.blogspot.com/2008/0 ... reate.html
What is going to end up happening is the person won't be paying mortgage to WaMU but to Federal Banking Center Inc, and the loan will be enough for the person to pay without going to repo.
Maybe that will happen eventually, but that is not part of the bailout proposal. What Paulson wants to do is buy up "mortgage-related assets." That means things like mortgage-backed securities, and various derivative products based on the MBS. For the MBS, banks bundle hundreds or even thousand of loans together, and divide the proceeds into groups (called "tranches"), with each tranche given a different priority for taking losses in the event of a default. Each security in the pool represents a fraction of ownership in the group of loans. Buying up that stuff won't put the Treasury Dept in direct control of individual home loans, unless they buy all of the securities related to a particular loan. But I would expect companies to selectively unload high-risk securities from lower tranches and keep the good stuff for themselves. Since the individual loans are split across multiple tranches, the odds of the Treasury getting complete control of a loan seem pretty low.
Basically, if your assets are bad enough and you haven't marked them accurately, you probably won't be able to sell them to the Fed. Because, the sale requires a mark to market, and that might be enough to push some banks under.
Here's the simple scenario, your bank needs to raise capital, so they look at stuff they can't sell on the market, and try to send that to the Fed. You've marked it down to 85%, but the actual market price is 40%, even if the Fed pays 50% for it, you've lost another 35% on the deal. That write-down could be enough to push your reserves low enough that you need to liquidate some other assets...so on and so forth.
What Markor says is a good point though. If other buyers come along, anticipating they will get a good enough price, they might buy up assets that otherwise couldn't be sold...bidding up the price. The risk, is what happens then. This bailout is supposed to be for financial institutions. Do we bailout Sears if they try to exploit the system? I hope not...