Still in Limbo- Bail out

[DH's better half]

OK, I will take a stab at explaining the rational behind the Bail Out.
However it will be an explanation without placing/affixing blame because 'when the house is on fire, first you put out the fire, then find out who played with the matches.

1)Mortgages were granted with the buy now, pay later attitude.
Adjustable Rate Mortgages (ARM's) were based on the premise that the buyer's purchasing power (income) would rise over time, as would the value of the property.
Because of this, buyers were able to get mortgages on properties that were 'beyond their means' at the time. The rational being that when the interest rate 'adjusted', (hence the name ARM), they would have more disposable income (be making more $$), and could meet their obligation.

2) Banks then bundled these mortgages together and sold them as 'investments', guaranteed by the mortgages they contained.

3) These 2 things together (with other factors)caused housing prices to rise, and rise, and rise some more. So far, so good.

4) Then the ARM's started kicking in. Buyers found their income had failed to grow at the rate anticipated. They were now stuck with a mortgage they couldn't make.

Here the dominoes start to fall....

5) Unable to make mortgage payments, and unable to sell their house at the artificially inflated price, buyers start to default. Unfortunately, as the defaults start to multiply, the housing prices now start to drop. So not only does the buyer have a mortgage they can't afford, now their house is worth less than what the mortgage is for. They are between a rock and a hard place. Here people start to cut their losses, and walk away from the debt.

6) Now all those 'investments' that were 'guaranteed' by the mortgages start to lose value because they're not paying the investors anymore.

7) Banks now have to start 'writing off' these 'bad investments' as debt against their net worth.

8) Because their net worth is dropping like a rock due to the write-offs, banks start limiting their debt liability. Credit tightens.

This is where it starts to hit 'Main Street' and spiral.

9) Businesses can't get the loans/operating money they need to buy supplies, make payrolls, etc...because the banks are afraid of the debt liability. If the business can't get operating capitol, they start to layoff employees. Because the business isn't buying, the supplier starts to lose money and they lay off people, and on it goes...

10) Now all these layoffs cause people to fall behind on credit cards, mortgages....creating more debt liability and more tightening.

In theory, the bail out relieves banks of the initial liability that began this downward spiral. Banks no longer have that choking their balance sheets, more operating capital is available, and credit is again available to lenders/borrowers.

In theory, the housing market will then begin to recover, allowing the defaulted mortgages to be re-negotiated so as to allow the buyer to ultimately honor his obligation and pay off the debt and make money (over time for the re-negotiated mortgage) for the lien-holder (us).

At least that's how this is suppossed to work....and this is a very simplistic explanation of a very complicated problem, but it's the best I could come up with at 4:30am...

Now, let the finger-pointing begin.....

[capricorn]

Thank you so much for the explanation. Very clear and to the point. Easy to read and understand.]


CAP

[Bad Boy Bad Boy]

The Bail-out, and what it will now do;

Banks now will be very selective on who gets Loans. People trying to obtain Loans, will with the best credit need about 20% down payment. Those with a lesser cerdit standard would need more than 20% down payment, and still may not get their Loan. Auto Dealers and Use Car Dealers are going to still continue to feel the pinch, along with their customers. Trying to buy a home, the American dream, will not become as easy as it use to be anymore, and maybe a good thing, if you can't afford, then you shouldn't buy it. In other words, the belt is going to now tighten up again the way it use to be is all. The housing markert might contnue to with houses being worth less then 2 years ago, or just hold their current prices. people in Foreclosure, might stay in it, for if it's found they can't afford it, then they lose out.

Remember, the Bail-out, was to bail-out Wall Street, not us in a whole...

[monster]

GReat explanation DH thanks so much. So far it is the clearest I have heard!

Has anyone heard that California is now broke or very close to it? Gov. Schwartzhisface has asked for a 7 billion dollar loan to help get us through. The little bit of money I have coming in is for taking care of roomie is paid by the state. I may lose my house yet....

[Still in Limbo]

Thank You So Much!!! I just Worry when the Bailout is Less than what was Lost on Wall Street on I Believe Wednesday!! I Hope this Works for Us All and Lasts for a While for Everyone. Thank You Again, You did a Great job Explaining this!!

[Bad Boy Bad Boy]

http://money.cnn.com/2008/10/03/news/eco...2008100412

Monster, as per the link, you are not lossing your house.

[DH's better half]

Thanks-
This really is a VERY simplistic explanation of the whole mess. Bear in mind this is going to take quite a while to figure out- some of the 'riskier' mortgages involved were split up into 'pieces' along the way and those pieces were divided between some of these 'investment' instruments to 'distribute' the risk over a broader liability. Then some of those 'investment' instuments were split up, re-combined with others and resold again. over and over. There are houses where my mother lives in Fla. where banks, real estate agents and mortgage brokers are trying to untie this 'Gordian knot' to figure out WHO actually owns these mortgaged/foreclosed houses. So for better or worse, we're in this for the long haul.