2022 Boise Idaho Real Estate Blog

The Financial Rescue Plan -- Broken Down

Main Boise Home Loans

President Bush signed the Financial Rescue Plan into law on Friday, October 3rd. I'll review some of the components that relate to the housing and mortgage market.

Last Friday's historic legislation included in the Financial Rescue (remember, this is not a bail out) Plan, coupled with yesterday's (October 8) 50 basis point ACROSS THE WORLD interest rate cut has brought one thing to the markets...volatility. I have seen mortgage rates hop around quite violently lately. Regardless of how the markets process and act upon these recent changes, it is interesting to look at the legislation, and break out what the main pieces of the TARP (Troubled Assets Relief Program) legislation are with respect to mortgages in this country.

Provides $250 billion immediately to buy mortgage-backed securities

It is unclear how the government will address some of these troubled mortgages with individual homeowners. It is logistically impossible to do this piecemeal at the micro level, but some sort of wharehouse channel thru Fannie and Freddie may be implemented to accomplish this. It is clear that the government wants people to stay in their homes, and is willing to do just about anything to make that happen.

Require the comptroller general to monitor and assess the effectiveness of TARP's performance

The emphasis here will again be on TARP's ability to prevent foreclosures. The stabilization of the financial markets will also be closely watched.

Reaffirm that the SEC has the authority to suspend mark-to-market accounting

This is a very interesting accounting rule. Briefly explained, market-to-market requires banks and other financial firms to report the present-day value of distressed assets that have a hold-to-maturity value.

I have very mixed feelings on this accounting rule, and I want to reflect on it with regard to a situation many banks in the Treasure Valley are dealing with...land loans.

One side of me strongly believes that an asset is truly worth what a willing buyer will pay for it...that's the heart of the mark-to-market rule. However, this gives no value to a financial institution's ability to ride an underperforming asset out, given that the loan is performing...the borrower is making payments as per the note agreement. See the irony here?

We have seen land come down in value tremendously in the Treasure Valley...in some instances more than 50% in the last year! Does that mean the land is truly worth 50% less than it was 1 year ago? If that land had to be liquidated, then yes...that is what it means. But that's not the case all the time.

SCENARIO: In January of 2006, a bank agrees to help a customer finance a $2.5 million land purchase for development. The customer puts down 30%, brings $750K of their own money into the transaction, and has made timely payments for the last 2.5 years on the $1.75 million loan from the bank. In August 2008, the bank re-appraises the land and finds out that the land is now only worth $1.5 million. Based on the mark-to-market rule, the bank would have to write down the value of the asset, reserve for the potential loss, etc. But what if the loan is performing? What if the borrower is well-capitalized and has the ability to continue to make payments into the foreseeable future? Based on the rule, the bank is required to show the current value of the distressed asset, and their books will show a (potentially exaggerated) loss of value on the asset.

So you can see why it is tough for me. Only the SEC and chairman Christopher Cox can suspend this, and I'm not sure if that is good or bad.

This fall, as the world's financial crisis, continues to be addressed, and the Presidential debates and elections take place, and the changes the new President starts making take shape, and how the nation's financial markets react to all the above...these issues make this time VERY INTRIGUING to me! People...please remember...this too shall pass. We WILL get through this...no doubt in my mind.

The doubts I have are whether or not we will be the same capitalistic United States of America that I have grown to know and love.

Posted by Eric Leigh at 10/9/2008 1:21:00 PM

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