Bailout - $7K/ taxpayer
September 28, 2008
Those of you who read my blog about Phoenix, Scottsdale Real Estate and new home builders and new home communities in Peoria, North Scottsdale and Glendale know that I have been opposed to the bailout in its current form. I do think Congress has been working hard to get a plan that will take a major step towards helping (maybe not fixing) the financial crisis that has put a stranglehold on real estate in greater Phoenix, Scottsdale, Fountain Hills and the nation.
The new rescue package is expected to pass Congress and would be the largest intervention since the Great Depression. Without going into too much detail the major changes are:
- The government could get at $250 billion immediately, $100 billion more if the president certified it was necessary, and the last $350 billion with a separate certification — and subject to a congressional resolution of disapproval
- letting the government insure some bad home loans rather than buy them — designed to limit the amount of federal money used in the rescue
- To help struggling homeowners, the plan requires the government to try renegotiating the bad mortgages it acquires with the aim of lowering borrowers’ monthly payments so they can keep their homes
- The government would receive stock warrants in return for the bailout relief, giving taxpayers a chance to share in financial companies’ future profits
I am still not satisfied that the plan will help real estate. I expect the government to take possession of real estate , like REO’s , think GEO’s (Government owned real estate) and they should not be expected to manage a real estate portfolio any better than banks who are in that business. As a result, I expect to see a lot of real estate hit the Phoenix, Scottsdale, Peoria real estate market in the next 6-9 months. More inventory, will drive down prices further. Maybe a necessary evil ? We will see.
Never the less, I am going to play devil’s advocate for a moment.
There are approximately 300 Million Americans and about 1/3 are taxpayers or (very) roughly 100 million taxpayers. At a cost of less $700 Million , that equals 7K/ per tax payer.
Agreed, it is not as good as getting $7,000. However, I would argue that if taxpayers are going to pay for ’social’ programs for the welfare of the American people, this is probably more important then health care, education or national defense. Further, these banks should have be able to pay these loans back, with interest. Additionally, the stock (warrant) participation should provide profit participation from the taxpayer investment.
No one disagrees that as a result of the real estate market and 30% price declines, Phoenix and the surrounding towns of Gilbert, Mesa, Glendale, Peoria and Tempe are suffering. We don’t need bank failures to tell Phoenix residents we are struggling. Just look at the amount of Phoenix area homes for sale, short sales in Fountain Hills and bank owned homes (REO) in Peoria.
Clearly, we need the banks to be solvent so that depositors will come back and banks can begin lending money again. Not until then can Phoenix real estate get back on the road to recovery.
However, even at a cost of $7K, I believe that every Phoenix area homeowner, Scottsdale new home builder and Peoria real estate investor would take the money out of their wallet to get real estate back on track to lead the economic recovery Phoenix residents need.
Let me know what you think.
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3 Responses to “Bailout - $7K/ taxpayer”
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Maybe I missed something but $700 billion divided by $100 million is $7 thousand per person.
Also, the issue of the government managing a large REO portfolio vs. private banks managing what they have already while a good discussion often raised when when speaking about the opposite (such as letting people manage their own social security or privatizing things like the division of motor vehicles as well as the argument whether Airport Safety which was privatized has worked which it has) is not the point here. The government is not taking the portfolio to manage it better. They government is taking it to end a liquidity crisis. It is helping banks take their losses this year and start taking deposits from eager depositors. It also lowers their debt ratios so banks can borrow again and in turn lend money in other profitable sectors that are in an indirrect stranglehold from bad Real Estate loans.
Derek Eisenberg
http://www.mls2u.com
Derek , you are correct, I will made the necessary edit. and yes you are correct, I agree, this bailout is something that has to be done. However, in my opinion, we will see GEO real estate hit the market at much lower prices than they would if the banks managed their own REO’s. Banks have shareholders to report to after all.
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