The Federal Reserve Bank has been taking a beating when it comes to how it has moved to handle the current financial and economic situation. The announcement of what is essentially a 200 billion dollar financing plan signals a change in direction.
At this point in time, there is really no more mystery regarding the real estate market. Things are simply a mess. Lenders overreached when it came to writing loans for borrowers that didn’t really qualify for them. When the real estate market slowed down, many of those borrowers couldn’t meet their obligations. Large banks and investors in the secondary loan market then started to hemorrhage cash as the loans they invested went bad.
All of this has led some absolutely huge losses by large investors and companies. The same investors are also players in most financial markets, which means everything has been impacted. Given the massive losses, a credit crunch has arisen that makes it much harder to find capital to fund transactions. Simply put, you may not be able to borrow money for a home even if you otherwise qualify. This, of course, has served to further crush the real estate market.
The first part of this decade was an amazing one for the real estate market. 20 to 25 percent appreciation rates in many parts of the country. It couldn’t last and it hasn’t. Now, we are seeing similar rates of value losses in some parts of the country. Given the lack of money for lending, the chance of a big turn around in the real estate market seems remote.
Real estate is the staple economic element of the middle class in this country. It is the foundation upon which much is built economically. This means something must be done. The federal governments decision to offer $300 to $1,200 in tax rebates is nice, but hardly a cure. The Federal Reserve Bank has recognized as much and taken a dramatic step.
The Fed has come up with a rather stunning financing plan to add liquidity to the markets. It has created an international consortium with the central banks of Canada, Europe and Switzerland. Together, they will loan $200 billion dollars to investment banks in exchange for debt including poor mortgage products. In short, we are talking about a huge bailout to try to get the investors that bolster the back end of the real estate market moving again.
Why has this happened? Why would these banks come forward and offer such a creative plan? Well, there is a scary secret out there. First, the worst has not yet hit in the real estate market when it comes to mortgages. Vast numbers of mortgages are going to reset this year and in 2009. This year, 2008, should be very ugly. To keep the real estate market from completely collapsing, the Fed is trying to make buying possible again via financing. It is a smart plan.
The question that most have is will this work? The Federal Reserve Bank has never done anything like this before so there is some risk. That being said, this is the type of creative and “out of the box” thinking needed at the moment. This plan seems to have a far better chance of working than anything offered to this point, so keep an eye on the real estate market. Liquidity can make all the difference between a dropping and rebounding market.