Is the government REALLY doing anything to help?

So we've all seen that the housing market has been sliding backwards for some time now. As a real estate professional, I watch the market intently on a daily basis. As I saw this happening, I saw the Federal Reserve and the various houses of Congress get up and talk about how to deal with the "subprime" crisis. I would hear news of rate cuts and "stimulus" and would get excited thinking that, as we've seen in past years, some minor adjustments would be all it would take to get the housing economy back on track.

Sadly, that has not been the case. Now, although I am listening intently, I give these promises less and less sway as it pertains to the real estate busines. I have begun to see a lot of these moves on the part of our government to be disingenuous in so many ways. For example: the Fed put a cash influx of $300 billion, yet the consumers saw no relief. The Fed has made drastic and aggressive rate cuts yet we, as consumers and borrowers have seen no movement in rates on the consumer side and, in fact, have actually seen a tightening of credit and lending policies.

Certainly the banks are wary now that they are feeling the impact of their loose lending practices; practices which have significantly contributed to the current economic crisis. Of course banks want to ratchet up the lending standards a bit to stave off any future issues. The problem is that the correction has been too steep and the pendulum has swung too far in the opposite direction. Instead of moderating and moving to a more reasonable and logical set of standards for lending, what was once a flood of money to consumers has not eased to a trickle. But there is more to it; much more! In the background, behind the scenes, the banks are scrambling over the fallout of the loose lending practices of the last few years as homeowners who now owe more than they paid for the home, are simply walking away from their properties or are, in fact, waiting out the foreclosure process and living, essentially, for nothing. Banks are cutting their losses and attempting to avoid the financial disaster of putting more cases into the already clogged foreclosure courts, cases which cost the banks ridiculous amounts of money, and are mitigating these losses by accepting pittances over what is owed by a current borrower in order to "short sell" a home.

Case in point: In a case I worked on recently, a seller was over 50k upside down in value versus what he paid for the home. He had negative equity and the need to sell. Furthermore, the values in his particular situation, were still in flux and trending downward. He had borrowed on a 100% loan, so he had no money into the home and this loan was structured by two lenders where one lender held an 85% stake and the other a 15% stake, (these types of loans were common practice whereby borrowers were able to avoid the 20% equity stake necessary to avoid private mortgage insurance or PMI). In this case, the lender with the 85% stake had the power position and agreed to take a significantly lesser sum in order to get the loan off their books. They then gave the 15% lender a total of $1,000 for their troubles which the 15% lender accepted knowing full well they would get NOTHING if the property were to go into foreclosure.

So, behind the scenes, the banks are working hard to stop the bleeding. Or so it seems right?

Not necessarily because when the Fed is bailing out big firms like Bear Stearns, infusing 300 billion into the economy and lowering rates, all without any quid pro quos, this has amounted to nothing but a stealth bailout of all the banks. This hasn't benefitted main street, it has benefitted Wall Street!

So now that we know these steps haven't worked and, just last month it was announced that real estate sales are off by 21% this year alone and are down to lows not seen in 7 years, what's going to happen?

There are a lot of ideas flying around. On Monday, the Washington Post reported about this dismal failure:

http://www.washingtonpost.com/wpdyn/content/article/2008/04/06/AR2008040601727.html

This is about a proposed incentive program from congress that will give incentives to people who buy foreclosed properties. The writer of this article called this a "pro-foreclosure" article as it, basically, promotes foreclosure and doesn't address stopping the foreclosure issue.

Now if you're a buyer this could be a very beneficial windfall. You can get a good home, at a good price, and get a bit of a government incentive for doing so.

But if you are a homeowner who is being threatened with foreclosure, then it puts you in a much stickier situation, particularly if you want to stay in your home.

The banks are working with people. Their loss mitigation departments are completely overwhelmed but even when mortgages are reworked, that doesn't guarantee that the problems won't continue for these beleagered and cash strapped homeowners.

The answer: We may need to consider that there might come a time where all values need to be scrutinized and reassessed and, if necessary, the banks are going to have to lower the principle on these homes to reflect their actual valuations. After all, with so much of the homeowner's payments going to interest we all know how much money the bank makes on the sale of a home. If people think Realtors make too much on a home sale, look at what your bank makes over the life of your loan. It's sickening!

There needs to be fair credit, maybe even a credit revolt to inspire a movement toward a truly fair system of credit for consumers.

For now, we can only hope that if the government is going to get involved at all, they do the right thing.

Mr. Bernanke: No more rate reductions or influxes of cash to benefit these banks. It is time to institute a quid pro quo; a price for the bail out. That price? Make your rate cuts and your cash influxes contingent on these banks making loans and not just "A" paper loans, but fair loans across the spectrum.

THAT is what will spark the economy. Accountability for these huge financial institutions is the only thing that will truly keep them from hording the money you infuse in order to mitigate their losses and truly put the money into the greater economy where it will benefit the average American.

Richard Doty