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The Daily Scoop

Restoring hope that credit will flow again to builders, homebuyers

Richard Defendorf, contributor

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One of the squeakiest wheels in the economic machinery has been tight credit, a byproduct of the toxic assets burdening many big banks’ legers and a source of frustration even for builders and homebuyers with spotless credit histories.

So the Obama administration’s newly announced program for drawing private investors into partnerships with the government to buy up these troubled assets raises the hope that credit will again flow to qualified customers, who will in turn help reduce the excess housing inventory and restore stability – and building opportunities – to the market.

The premise of the program is that private investors and the government will share the risk for each bundle of bad loans they purchase. The Federal Deposit Insurance Corporation will auction pools of bad loans to the private investors, helping assure that the prices paid for the loans are appropriate. The FDIC will guarantee the bulk of the loan bundle's auction price, while the Treasury Department, using funds from the $700 billion bailout, and the top bidder split the balance.

Of course there is no guarantee that the program will work, and its potential benefits could take a while to kick in, but it is a practical plan that stands a decent chance of success (and was cheered by the stock market on Monday). It can’t come too soon for the housing market, which saw February’s existing-home sales climb to a 4.72 million annual rate, up 5.1% from January, as prices continued to fall, according to a National Association of Realtors report released on Monday.

About 45% of total existing-home sales were of foreclosed and short-sale properties, whose prices are heavily discounted, the NAR noted. Nationwide, the median price for an existing home was $165,400 in February, down 15.5% from the same period in 2008. The NAR data also showed the for-sale inventory of existing homes increased 5.2% at the end of February, to 3.8 million properties.

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Comments (2)

mddesignhomes writes: Sometimes adversity creates opportunity. This could very possibly become a situation where properties that are nothing more than liabilities (toxic assets) to the banks, can be converted into future profits (detoxified assets) to those investors able and willing to buy these heavily discounted properties. Buy low now, wait for the market to return again then sell for a profit. We have already given the banks hundreds of billions of dollars to make up for the losses. As long as the banks still own all these properties they will continue to keep loosing money because of them.
Posted: 2:40 pm on March 27th

ronlbrenner writes: I cannot see how this program will help. By definition the government will be over paying for the bad debts. The government will be paying a price the banks are willing to sell for - but the banks currently cannot get in the free market. What investor wants to overpay? This feels like another bad idea out of washington.

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Posted: 6:44 am on March 25th

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