$700 Billion - WHY?

Posted by Emily Ray-Porter Group on Friday, September 26th, 2008 at 1:39pm.

This week, the Treasury Department has proposed a sweeping new bailout plan for banks, designed to stabilize financial markets. The plan is designed to calm the financial sector and give banks an outlet to sell their bad debt so they can resume lending again. Here are some of the basic points you need to know about the bailout. 

What led to the bailout?In recent years, loan underwriting became more relaxed, making homeownership possible for more and more people. Many of these loans were called subprime mortgages and they were often riskier than regular mortgages.  At the same time, these mortgages were packaged with other kinds of debt and sold on Wall Street as mortgage-backed securities. They were in demand because housing was strong and home prices were rising. These mortgage-backed securities were sold among investment banks and other financial institutions and eventually overseas.

When housing began to slump, the value of these securities also began to decline, leaving many institutions holding securities that were worth much less, with very few buyers willing to purchase them. In addition, some banks experienced rising foreclosures among their mortgage customers, which also caused problems. That has essentially frozen the secondary market for some of the securities. 

What is the bailout plan?

It’s an expensive plan, but a very simple one. The Treasury Department would be authorized to spend up to $700 billion to buy and sell bad debt from banks. The Treasury would have a two-year window to buy securities once the law goes into effect.  Some Congressional leaders are also pushing to have other pieces added to the legislation, including homeowner foreclosure assistance.

 Treasury Secretary Henry Paulson made a compelling case for the bailout: the credit markets are nearly frozen with unsellable bad debts of unknown value. Without the government to step in to buy that debt and create a market for it, the credit lockup will get worse.  

Mortgages - what’s old is new againAs a result of this fallout, mortgage products have returned to basic, tried-and true loans with detailed documentation and down payments. FHA and VA loans continue to be strong, due to government backing.   

 

Courtesy of Christian Johnson and Shelter Mortgage

Shelter Mortgage has always remained committed to tried-and -true, solid lending practices, while offering innovative mortgages to make homeownership available to many...  While this shakeout can be unnerving to some, Shelter Mortgage has experienced the ups and downs of many mortgage cycles, the introduction of new products, and the return to basics.  As your partner, I am committed to keeping you up-to-date on what’s going on in the financial and mortgage markets, should you have any questions, please contact me.

 
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