Foreclosure Bailout Effects on Local Markets Not Yet Clear

Posted on November 10th, 2008 by saman

Last weeks announcement that the financial industry’s $700-billion bailout might include help for Americans facing foreclosure has left those in the real estate and mortgage industries with questions.

The plan was proposed to congress by U.S. Treasury Secretary Henry Paulson, but has not yet been approved. It states the Treasury would buy $700 billion in mortgage-based bonds and securities, but does not state exactly how these mortgages are to be handled.

The potential effects on local real estate markets depends on what the Treasury plans to do with the bonds and securities they buy out. There are two potential outcomes. They could allow the borrowers of those mortgages to negotiate new terms that they are capable of meeting, or they could seize the properties and attempt to sell them to make some of the money back.

Ideally, help should make it down to the average homeowner. About ninety-percent of American homeowners are upside down on their mortgages; many of them just do not know it yet. Mortgage experts have suggested other options that could help improve the current problems. It might be helpful to reduce the current credit restraint, which would enable more consumers to purchase high-priced items, such as homes. Other experts suggest consumers currently locked into adjustable-rate mortgages should be given the opportunity to refinance into fixed rate mortgages. If the interest rates were lowered, that would help even more.

Overall, real estate and mortgage experts are left with serious questions as to whether this bailout plan would actually help their struggling local markets or simply delay the problems temporarily. It depends on how the federal government plans to handle these bought mortgages. Some experts believe the government’s impact will be lowered because they waited too long to take action. They needed to step in long ago, before the problem spun out of control.

Many experts do not believe the bailout will fix the credit crunch, since banks are going to be much stricter on lending practices. Many real estate experts expect a flat market at least in the short term. A lot of the properties currently going into foreclosure are not in good shape and thus many are selling at half their estimated value. While this may benefit some foreclosed home buyers who have the credit to get a loan, it is hurting more people than it helps.

While most real estate and mortgage industry experts do not agree with the Treasury bailing out the banks which caused the problem, they also admit that the alternative is much worse. Some are relating this to the great depression and saying there is a potential for “financial Armageddon.”

Whether Paulson’s plan passes congress is not known, but there is pressure for the federal government to act quickly before the foreclosure problem spirals anymore out of control. It is yet to be seen what the effects on local real estate markets will actually be.