Upcoming Foreclosures

How does the transfer of bad bank assets to some sort of US government note, benefit the housing market?

The hardest thing for me to understand is, how this transfer of bad asset to some sort of US government note, will benefit the housing market. My crude understanding of the market is that prices go up when someone is willing to pay a higher price for an item. So the asset shifts off the books of the banks. If that covers only assets that have not yet slipped into foreclosure, then the new note holder (US GOV) can relax the terms, in the hopes that the relief is enough to keep the payment mill running, if every one continues to pay then, success. That’s all fine and dandy, but what about all of the homes that are foreclosed and will be foreclosed? Who is to hold these assets? As of March 20, 2009 banks are holding many, many REO’s that they are unwilling to sell at a loss because they believe the US government will relieve them of the burden. If the US government takes these and they are released on the market, prices will really hit the bottom, great for buyers, bad for US government, or is it? With interest at these levels (sub 5%) rock bottom prices, we might just see prices increase sooner rather then later, well that is after prices drop lower and the inventory is exhausted. If the US government is expecting these assets to turn a profit that would mean that homes have to be sold, so that the payment mill can jump start the banks. Then it’ll drive all the people that made all the right moves, good credit, savings, good job, a proven worker, earner, tax payers, to buy buy buy. So, that means good news for the banks good news for US government, and more importantly good news for me. I guess this is one of the more optimistic outcome that I've been boucing around on these late nights with no sleep. Let's hear your spin.

Public Comments

1. If a bank falls below a certain level of "assets" or reserves, it is insolvent and could be closed. So the banks keep a car loan on their books as an asset....even tho the owner of the car is 4 months behind on her payments. That loan is not an asset any more. It is non-performing. But the bank doesn't want to switch it from "asset" to "loss" because it could cause the bank to be closed. So the bank cheats and keeps listing it as an asset. Which means that no one trusts the banks any more. No one will loan them money. No one wants to invest in the banks. So if the US government takes over that bad car loan, the bank can now honestly say that its assets are "good" and they won't be lying any more..