Subprime and the Government

Commentary by James A. Crumbaugh III

RISMEDIA, Oct. 1, 2008-I have tried to get my head around the $700 billion dollar bailout that our country may be about to embark upon. So far I’ve haven’t been able to read any fine print since the final proposal is not yet approved. And, of course, we measly little taxpayers will not see the fine print until the deal is done.

I keep wondering how this bailout will really affect our industry. If the government is going to hold these bad mortgages until the loans are seasoned and healthy again, will that mean that the REO’s are about to disappear from the marketplace? Or is the government going to dump all these properties on the market at a greatly reduced price?

I can’t imagine the government dumping all these properties on the market, because that will only worsen real estate values and create more of a mess. So I guess they are going to hold these mortgages, which means the REO’s will go away, which will stabilize real estate prices.

Real estate prices will not stabilize until the rash of foreclosures slows down and the banks and/or the government quit dumping short sales on the market.

So, if the government is going to work with all the homeowners currently on the edge of foreclosure, what is the government going to do? All they can do is lower the monthly payment to the homeowner on all these potential foreclosures.

So I guess the government is about to become the largest subprime lender in the history of mankind.

One of my greatest concerns is that when this bailout gets approved, what about the next wave of potential foreclosures?

There are probably millions of homeowners who are really strapped to make their mortgage payments right now because they’ve been laid off, have health costs, along with a host of other issues. I suspect if the government is going to make it easy for all the homeowners who are in foreclosure, then surely they will also help the homeowners who are doing their very best to continue to make their mortgage payments, even while they struggle to put food on the table or afford their medications.

I believe we will see a large, second wave of homeowners, who aren’t in foreclosure, taking advantage of the bailout to lower their mortgage payments until both the economy and the real estate industry improve.

I hope the wisdom of our leaders in Washington have considered this scenario, because if they don’t have this second wave figured into the $ 700 billion bailout, then $700 billion won’t come close to covering the problem.

I have very serious concerns about this bailout and how it’s structured, but to avoid politics I won’t go into the reasons why. However, if it is done correctly (which would be unique for the government), it has the potential to turn the real estate market around fairly quickly. We will see prices stabilize, and, in markets with less than a one-year supply of inventory, the prices will start to rise.

For more information, visit www.allisonjamesinc.com.

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