The "Bailout" - what exactly does it mean?

Hopefully in your comings and goings as Realtors you see people who want your take on the markets - whether they be the financial markets, the mortgage markets or the real estate markets. Being able to have a good answer to basic questions is a key to holding up your image as a professional people can consult with when they need good advice.

So with that in mind it is important you have an answer for "the bailout". What is it? How did it come about? What impact will it have upon me if I am buying/selling a home?

The hard part now is to answer it as a professional and not to let the politics we are all hearing get in the way. After all, the reason our clients are coming to us is that they want a better understanding of the facts - not the politics.

So here is the Reader's Digest version of what happened and what is happening...of course I welcome any comments from people who want to expand on what I am saying or challenge the facts.

It starts when the nation's mega-banks decided to buy up loans from lending institutions that didn't do their homework when they qualified the borrower. Most of these loans (called Alt-A or "liar" loans) were made in states where speculators thought they could buy a property and flip in a few months for extra cash. Unfortunately, because there were so many of these properties available and because the legitimate lenders were being more cautious with their funds, the prices began to drop and the investors were left with properties they couldn't reconcile financially and so they walked away from them. Now the mega-banks weren't getting any money back on the loans they purchased, which meant they couldn't put more money back into buying up new mortgages (or when they could they were being very cautious), which ultimately meant the lenders weren't able to make more loans to "legitimate" buyers.

Without getting too technical, the mega-banks have holding requirements that they have to adhere to with the federal government, plus they have their own businesses to run. When you don't have money coming in, and the money coming in you have to keep in the bank, it is hard to run your business. Eventually, it comes time to just close the doors.

Closing the doors at the local hardware store hurts the people who own the hardware store, maybe the two or three employees they have and the vendors who sell stuff to them. Certainly it is painful, but in the overall economic sense it doesn't bring things to a halt. When a mega-bank closes its doors, however, now the pain is greater. Not only are the employees hurt, but all the businesses that rely on that bank's line of credit also have to shut their doors. Now the products we rely on for day-to-day living can't be made, because the people making them can't buy the raw materials when their line of credit dries up. For real estate professionals, what that means is that the mortgage companies that make loans based on their expectation that a mega-bank will buy that loan have to stop lending too. Essentially, things come to a screeching halt.

In steps the government. They recognize that a slowdown (or worse yet a complete stop) of production doesn't do anyone any good so they offer to buy up the "toxic assets" of the mega-banks. This is the bailout. Supposedly, what this program will do is give the mega-banks the capital they need to stay in business, extend credit to small businesses and most importantly, buy more mortgages made to "legitimate" borrowers. This is the key to your success.

If more working capital is made available to the mortgage markets, that money is going to be put to use buying homes. That means buyers who may not have been able to qualify in the past may suddenly find themselves eligible. Buyers who are still paying rent may suddenly find they can get that 80/10/10 loan they weren't able to get a few months ago. All this "new" money in the system hopefully can drive buyer behavior (much like when Clinton announced his home ownership initiatives in the 1990s that launched a new wave of buying).

Now combine the possibility of new money with a tax incentive for first-time homebuyers and there is real optimism on the horizon. Let's hope it plays out that way, because after all there is still politics involved.