I answer some questions from a friend regarding my This Week in Finance posts.What did you find through your analysis of the bailout plan?
The Ds didn’t get their way on all of the “Mainstreet” protections (mortgage reneg, unemployment, et al) but they had to capitulate in order to get it passed which in my opinion was necessary. Why? Because you had two options do something or do nothing and it was pretty clear that after Paulson hyperbolized the urgency of the plan the markets (which include anyone with a bank account or 401k) expected the former.
Do you think it’s a good idea?
I do. Again, for me it was do something or do nothing and in this case I was in favor of doing something. Some respondents mentioned that after two rounds of failing to secure passage the world had not come to an end, and congress was just grandstanding and hyperbolizing. The problem with that however is that the markets had come to expect something and like a spoiled child when it didn’t get what it wanted it had a fit. Barring continued doing nothing in the face of the markets fit you would have SERIOUSLY perpetuated increased lack of confidence, fear and ultimate run on the banks which is exactly what none of us want.
How do you think it will affect normal individuals (first time home buyers, middle income buyers, small time investors) in the long run?
I think it has already positively affected normal individuals by returning some relative level of confidence in our national and global financial system. Just think of your mindset 10 days ago, if you’re honest you probably bought in; however slight, to the end of the world, go buy gold and euro scenario. From what I gather the bill doesn’t include protections for those who are in trouble of foreclosure but the good news is that Countrywide and Justice settled independent of this bill and will begin allowing mortgage holders to renegotiate loans to more favorable terms. I like this move because it will stem coming foreclosures, stem falling home prices vis-à-vis foreclosures and the progressive in me would rather see those who are already in a home stay in their home regardless of the factors that got them in that position. The downside however is that banks maybe a lot more hesitant to make loans if they know they can simply be forgiven or re-written in a way that is unfavorable to their business model, which in theory could ensure that the market persist in its current funk.
More importantly, how will it affect existing home owners?
I think homeowners that live in their homes will be fine, or at least better off than the spec plays. The reason is that the boom in construction of condos, townhomes, new single family communities from 2003-2006/7ish was predicated on the existing financing structure of that time, namely giving money to people who wouldn’t otherwise get it. Since that ship has sailed and the banks WILL NOT be making that mistake again you will be left with a bunch of homes and no buyers. The steps taken and mentioned above may lessen that imbalance in supply/demand but I don’t see it going away because there are just too many properties that exist. So you know from your studies of Econ 101 that the only thing that will happen is for the price of the product (home in this case) to go down. This is where the homeowner may take a bath in terms of the value of their homes, since the value of their home will no doubt decrease in value along with the spec properties which will need to happen in order for the spec to sale. I also see how this may help the banks begin to lend (see above) because while they won’t give a 250k loan to Joe and Jen Six Pack with a household income of 70k they may be more inclined to give them a 100k loan. So to summarize, prices will fall to the level that banks will be willing to lend to purchase the outstanding properties.
