This is an article we found today. It is very interesting, and we really enjoyed reading it. The premise is as follows:
1. With the housing market crash and the resulting sky-rocket in foreclosures, opportunistic investors were preparing to buy mortgages in bulk from banks and lenders who had these toxic assets on their books. We are talking $.50 on the dollar here. These folks would, certainly for a profit, hope to "renegotiate" with borrowers in an effort to save their home while receiving a nice profit due to the price at which they bought the mortgage (this is one option and example). Another option is, if the home was already vacant, they could sell it at a discounted rate and still profit because of the amount they bought the mortgage for. This process would have stabilized the housing market much faster.
2. However, what actually happened is the government stepped in and started pumping money all over the place to try and stabilize the market. But what this did in reality is change banks willingness to sell these assets because it held out hope that the government would step in to rescue them. Why sell things one a fire sale when the government may come in a save your butt?
3. What this has now done is created an unhealthy situation where banks will not sell, people then just fall into foreclosure, investors cannot buy loans cheap, investors cannot sell the homes for cheap, which slows down the recovery of the real estate market.
The last three paragraphs of the article are a perfect summary of the effects that the government intervening has had on the economy, especially real estate:
The private market for delinquent mortgages once held the potential for a market-based solution to the country's housing woes. It was no magic bullet, to be sure. But by fostering an environment where private capital could seek out advantageous investments, housing markets would have started down the path towards true price discovery.
As it happened, however, massive government intervention into the market via TARP, the foreclosure moratorium, the PPIP, and other programs forestalled the inevitable, pushing the date of the eventual recovery years into the future.
This is good news for banks that survived the maelstrom of financial market turmoil, albeit based largely on trumped-up earnings and unrealistic asset prices still on their balance sheets. For homeowners, consumers, and the public in general, however, true hope for a legitimate stabilization in housing markets, and the economy in general, has been pushed further along the curve.
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