The general arguments concerning the bailout have gone something along the lines of

"The taxpayers should not have to foot a 700 billion dollar bill to bail out Wall Street"

"But if taxpayers do not bail out Wall Street the economy will fall apart and those same taxpayers will be hurt"

If we could be sure the bailout would work the second argument has some merit. While the bailout will certainly help the banks, the problem is we have almost no guarantee the bailout will help the real estate market and the general economy.

First let's look at some recent history of how the Fed has tried to help the troubled real estate market. The Fed usually attempts to lower mortgage interest rates to help the real estate market. By lower mortgage rates houses become more attractive. In addition, with lower mortgage rates home buyers can buy more expensive houses with the same monthly payment. Therefore lower rates can help stop falling prices. So it was not surprising in early 2008 the Fed cut the Fed rate. In normal markets lowering the Fed rate helps banks and causes them to lower mortgage interest rates. And after the fed cuts mortgage rates for a period of time dropped to 5.50. If they had stayed down there we might have averted some of the problems with the current housing crisis. But instead a few weeks later rates had jumped backed up to 6.2. Basically banks said thanks for the lower fed rates but we are not going to alter our rates. In fact, over the next few months mortgage rates rose all the way to 6.6. The next big move was acquiring Freddie Mac and Fannie Mae. This was one of the largest government takeovers in US history. The move was risky because the government was providing insurance for trillions in loans. And it initially had a positive effect on the housing market. But a few weeks later AIG ran into financial problems. It was almost as if the government takeover of Freddie Mac and Fannie Mae never happened.

So the previous moves the federal government has made to stop the financial crisis have not worked. Should the 700 billion dollar bailout be different? It could certainly help the markets. But it might not. Lets look at why.

One of the benefits of the 700 billion dollar bailout has nothing to do with banks. It has more to do with perception on Main Street. The hope is that the bailout will restore confidence in the real estate market on Main Street.

In politics people often talk about news cycles covering up the last news cycle. Basically the last piece of news stays in people's minds until the next piece of news comes along. The Fannie Mae and Freddie Mac news cycle (and the billions the government will spend on it) only lasted until the next piece of news, which was about a week. While the 700 billion dollar bailout should restore some confidence into the real estate market, that confidence might only last until the next piece of news. And with things happening so quickly that news cycle might not last very long and given the current market the next piece of new is likely to be negative.

The other benefit of the 700 billion dollar bailout is that the government is hoping to influence banks to start lending again. The idea is that by taking billions in toxic loans off the books for banks they will start lending again. The problem is that their is no guarantee this will happen. In fact when the fed lowered rates banks said thanks but decided that prospects for the housing market looked negative and continued to add restrictions to lending. In a similar fashion banks could say thanks for the 700 billion but we continue to see negative prospects in the housing market and therefore we will continue to have strict lending practices. But thanks for the 700 billion taxpayers.

Escapeso real estate is a small brokerage in Austin Texas. Their realtors works with clients looking for Austin real estate. Their site offers a free search of the Austin MLS along with current mortgage interest rates.

You would probably have to have been living on a remote desert island for the better part of two years to not see any signs of the slowdown in the economy of the United States. Since August of 2007, the real estate market has been reeling from plummeting house prices, due primarily to increasing defaults on sub-prime mortgages. While these mortgages were issued to millions of borrowers with patchy or relatively poor credit ratings over the past several years, interest rates remained unusually low before the Federal Reserve began to increase rates over 2005-2006.

Up until late 2006, this process was self-reinforcing, mainly due to the delayed impacts of interest rate changes, not to mention encouraging profits for lenders, who would often repackage the loans into securities which could be sold to investors globally. Many analysts called it a new era in risk management, justifying the arcane nature of many of these new investment entities with ever-larger profits.

But just as higher interest rates began to take their deflationary effects on the larger economy, millions of sub-prime mortgages began to reset, their rates immediately dependent on available credit. Moreover, many borrowers were not made aware of the insidious nature of their home loans.

Often, their interest rates are artificially low for some period of time, usually one to two years, and then change to reflect market rates afterward. These "teaser" rates were designed to lure more potential homeowners, and they worked: all estimates of the amount of sub-prime mortgages number in the millions, and many consumer advocacy groups have decried the skyrocketing incidence of "predatory loaning" leading up to the credit crunch. Defaults have continued to increase, which has forced the financial institutions which invested in mortgage-backed securities to write down billions, eventually leading to the spectacular collapse earlier this year of Bear Stearns, formerly Wall Street's fifth-largest investment bank.

Since the securities made from these increasingly worthless mortgages have been so widespread, any effort towards recovery must first be focused on stabilizing borrowers, who are increasingly behind on payments. In this respect, the government has taken several different courses of action. In an effort to stop unnecessary foreclosures, the US Treasury has begun an initiative to freeze mortgage payments at current levels for qualified recipients. However, its restrictions make less than 5% of homeowners eligible for the program.

In addition, the Treasury has introduced a plan to reorganize and regulate the lending industry over the next several years, which should help streamline the financial system in the future. However, its greatest effect so far has been to distract from more immediate economic problems.

By far, the greatest player in the recovery effort has been the Federal Reserve, which reversed its previously hawkish view to drop mortgage interest rates multiple times, from 5.25% last summer to 2.25% now, with a further cut of 25 basis points highly likely at the next meeting. They have also taken the unprecedented move of making its "discount window" rate loans available to investment banks. This access has historically only been available for commercial banks up until this point as a matter of last resort, but by bailing out Bear Stearns, the Fed made a commitment to help troubled investment banks weather the credit crisis. A recovery will require a combination of liberal monetary policy, further government intervention on behalf of mortgage holders, and enforceable regulation in order to prevent another bubble.

Ki is a real estate agent in Austin Texas. He runs a site filled with information about Austin real estate. His site provides information on mortgage interest rates along with a search of the Austin MLS.

In recent months, the US real estate market has seen its fair share of turbulent weather as house prices continue to fall. While the Federal Reserve has taken significant steps towards making lending cheaper, interest rates remain artificially high as the troubled financial sector continues record write-downs. So far, only a quarter of the IMF-estimated $1 trillion in sub-prime losses have been reported, which means mortgages won't be affordable for a long while, even if homes continue to decline in value. According to the Case Schiller house price index, which covers 20 major metropolitan areas, house prices are depressing at an annual rate of 12.7%, though its rate of descent is accelerating. As long as homeowners continue to lose equity, loans will become increasingly difficult to obtain.

As this feedback loop works itself out, a regionally dependent phenomenon has begun to emerge. Although home prices averagely dropped in the US the story doesn't end there. Despite lowered economic growth forecasts and commodity-related inflationary pressures, (which are felt much more diffusely throughout the economy) several metropolitan areas have remained more robust, which explains dissenting votes on the past two rate cuts by the regional Fed chairs from Dallas and Philadelphia, respectively. Part of their reasoning is based on working against what they view as a misconception about the scope of the Fed's powers among many investors; namely, that the central bank is the only agent responsible for assisting challenged markets. Political jockeying has and will continue to play a role in their decisions, especially in the charged climate of an election year, but their dissenting votes represent the resilience of many areas of the US that continue to experience growth. From Charlottesville, North Carolina to Austin, Texas, many metropolitan areas continue to develop quickly, seemingly insulated from much of the speculation and predatory lending that has defined tracts of the US. While some of the worst affected markets in the Southwest like Phoenix, Arizona and Las Vegas will take considerable time to rebound, some price correction was inevitable. This is partially due to property value spirals in recent years, without corresponding increases in infrastructure and demand. In markets where growth had already been steady, home prices have been relatively stable.

If the federal government steps in further to freeze or help re-negotiate more of the estimated two million sub-prime mortgages projected to default over the course of 2008, prices may stabilize more quickly. Politicians, closing ranks in a show of solidarity, will likely be reluctant to make bipartisan efforts a priority while the presidential race remains in the limelight, which makes investment in the near and medium term likely to be more profitable, both in markets where prices have overcorrected and in stable markets. This is because any government-based mortgage interest rates freeze may be less favorable than current rates, which are firmly negative. Moreover, refinancing remains available should climates change. In any case, the worst may not be over for a lot of America, but some places have weathered the past eight months relatively unscathed.

Escapesomewhere Real Estate is a small brokerage working in the Austin real estate market. They host a free search of the Austin MLS along with providing updated commentary on their Austin real estate blog.

Mortgage interest rates remained relatively unchanged for the second week in a row.

Mortgage Interest Rates Historical Mortgage Rates

(to post the above widget on your site go to
www.escapesomewhere.com/rates.html)

April 10th, 2008
30-yr 5.88 15-yr 5.42% 5-yr ARM 5.56 1-yr ARM 5.19

April 3rd, 2008
30-yr 5.88 15-yr 5.42% 5-yr ARM 5.59 1-yr ARM 5.18

March 27th, 2008
30-yr 5.85 15-yr 5.34% 5-yr ARM 5.67 1-yr ARM 5.24

So what is going on? The FED has been attempting to stimulate the economy by cutting the FED Funds rate. But the first few times the fed cut rates in 2008 banks did not respond by lowering mortgage interest rates. Since this is one of the main tools the FED uses to influence the economy and mortgage rates this was a cause for concern. If the FED losing its influence over mortgage rates would be another negative factor weighing on an already weakened economy. In the beginning of March their were some pronouncements from analysts that we should expect more FED rate cuts but we should not expect to see lower mortgage rates.

But then after the latest fed cut on March 18th mortgage rates fell from 6.13 to 5.87. So what has happened since then? Basically, in the absence of further rate cuts by the FED, mortgage rates have remained relatively constant. In the midst of lots of bad news for the national real estate market this is actually a good sign that banks are apparently happy with the spread between the fed rate and mortgage rates. Hopefully future fed cuts (and it seems apparent at this point the fed will continue to cut rates) will result in lower mortgage rates.

Ki works as a realtor in Austin. He runs a site about Austin real estate which provides a free search of the Austin MLS and a free mortgage calculator.

More times than I can remember I had a buyer interested in a property think that I would be thrilled when I found out they didn't have a buyers agents. I'm not excited. In fact I would prefer that they had a buyers’ agent. Here are the reasons why:

1) Liability - There is more liability for me if the buyer doesn’t have a buyers’ agent. While some agents prey on unrepresented buyers knowing that they don't deal with home transactions on a full time basis, I don’t think that is the best way to do business. But without a buyers’ agent, there is still a greater chance that the buyers won’t understand aspects of their new home. And unrepresented buyers are more likely to be miss important details that they will get angry about later on.

2) Workload - Dealing with another agent lowers the workload on me substantially. I am dealing with someone that knows the contract process and the expected behavior. When I have to deal with an unrepresented buyer, I have to spend a lot of time explaining the process to them. It’s more difficult because unlike my seller the buyer typically doesn’t trust me because I am working for the seller. And because some listing agents prey on unrepresented buyers, it makes sense they don’t trust me. So I usually end up spending much more time explaining the process to a wary buyer, especially when he / she bought a house in a different state or has not bought a property in a few years. In this case, any differences between what I am doing and what they experienced previously are met with suspicion.

3) Likelihood of the Deal working Out - In my experience, deals with unrepresented buyers are much less likely to work out. During the inspection a good buyers’ agent can explain the difference between serious issues that need to be fixed vs issues that are normal. Unrepresented buyers typically get a list from an inspector and become overwhelmed and back out of the contract. Or they expect the seller to fix everything on the inspectors list because they don’t understand what is important. And in this case, the seller usually refuses and the deal falls apart.

So when I get two offers for the same price I usually tell my seller that the offer with the buyers’ agent is more likely to end up closing. The obvious question is why don't I favor the offer without a buyers’ agent considering I will make more money? While this is true, my view is that I will have to do substantially more work, with more liability, and the deal is more likely to fall apart, meaning I did all this work for nothing and I am back where I started out - a house on the market with no offer. So it’s generally better for me and my client to accept an offer with an experienced buyers’ agent working on the other side of the transaction.

Ki is a realtor in Austin. His site has a search of the Austin MLS and provides information for buyers on the Austin Texas Real Estate market. He also provides updated real estate statistics on his blog about Austin real estate.

The recent government-sponsored bailout of Bear Stearns, one of the top five lenders in the United States, has shocked traders and left investors cold. Despite the chilly reaction on Wall Street, secretly many are breathing a sigh of relief. While Bear Stearns was mismanaged from its upper echelons, its subprime exposure grew until their recent $30 billion-plus losses had to be reported.

Once that happened, their course took a turn for the worse. As their ability to shore up capital faltered, JPMorgan Chase stepped in with a buyout worth a bargain $2 a share, valuing a company worth $3.5 billion down to $236 million. Quite a savvy deal, if obviously designed to ensure continued security in the market more than pure profit (after last year's hedge funds collapses, Bear Stearn's lawyers have been busy with sub-prime exposure-related litigation). With the impact of derivative investments and more sophisticated financial instruments, the notational impact of a Bear Stearns collapse comes at a staggering $10 trillion. Moreover, even at a share price that attractive, the Bear Stearns rival wouldn't have bought them unless a fundamental shift in monetary and fiscal policy hadn't occurred: The Federal Reserve's liquidity offers to commercial banks, which have been numerous in recent months in the wake of the credit crunch, have been offered to Bear Stearns for the purpose of covering billions in frothy investments.

This sets a dangerous precedent against the continued function of American markets by using taxpayer dollars to bail out what is an entirely market-related mistake. By covering bad investments with taxpayer money, the Federal Reserve reverses sixty years of capitalist policy in favor of blatantly socialist takeovers. This could be the worst way to introduce Americans to this form of quasi-socialist government ever conceived.

No one put a gun to Bear Stearn's collective head and made them spread risk ineffectively and invest in sketchy sub-prime mortgage securities. They did it all by themselves. Yet here we see a government-backed takeover to shore up confidence in a financial system that seems unable to take care of itself. Laissez-faire? Quite the opposite, it appears. What kind of message does this send to other financial institutions? Can they now expect similar access to the "discount window" that had been reserved for institutions that work with taxpayers, not investors?

We now have the dubious half-promise that the Fed will rein in on Wall Street during boom times, but isn't it a lack of regulation in loaning standards and a subsequent rise in "predatory loaning" what got them into this mess in the first place? And how many more Bear Stearns get the Fed rescue while millions of Americans face foreclosure? The Fed haven't received much criticism thus far, as their responses have taken a course they have helped the economy weather in past recessions. However, their break from past precedent will likely draw some flags. Even if no one else will tell the emperor that his clothes are slipping off one piece at a time, hopefully the Presidential candidates will pounce on this new opportunity to compare traditional economic goals with the present shift in policy.

Ki lives in Austin and writes a Austin real estate blog. His site is filled with information about Austin real estate and includes a free search of the Austin MLS.

What a difference a year makes. Last year at this time Bear Stearns had a high flying stock price of $150 a share and a market valuation of 20 Billion. Having been founded in 1923 they were considered one of Wall Streets most venerable investment houses.

Going back to 2005 Bear Stearns was selected as "Most Admired" securities company in Fortunes annual survey a distinction they retained until 2007. During this time period many of the decisions that would lead to their eventual downfall were being made. In the middle of 2007 the armor of Bear Stearns started to crack. The subprime problems were beginning to explode. Basically it was becoming clear to the financial industry that many of the subprime loans that had been given out over the last few years were not going to be repaid.

One of Bear Stearns funds, the "High-Grade Structured Credit Fund", started to falter. In a sign of things to come when Merrill Lynch acquired 850 million of the collateral for the fund they were only able to auction it off for 100 million.

A problem started to develop with two of Bear Stearns funds that operated as hedge funds. The interesting word here is hedge fund. Hedge funds basically operate under the philosophy that by investing in a large number of loans that are somewhat risky you minimize the risk. While a few individuals might go into foreclosure the investor is protected because they have invested in a high number of loans. The problem the financial industry started to realize in mid 2007 was that a large number of these were going into foreclosure. In July these two hedge funds had lost nearly all of their value.

By August lawsuits had started flying as angry investors started to sue over their losses alleging that Bear Stearns had not property disclosed their exposure to hedge funds. A few months later Bear Stearns declared write down of 1.2 billion on their securities.

2008 brought more problems for Bear Stearns. Rumors started to circulate that Bear Stearns was having cash problems. JP Morgan started to provide emergency funding to Bear Stearns but it did not seem to stop Bear Stearns slide into financial chaos. This led to the final offer of 240 million for Bear Stearns. Not only was this substantially less than the 20 billion Bear Stearns was worth a year ago, but it was less than the value of Bear Stearns headquarters in New York which is valued at 1.2 billion. The fact that the purchase price is lower than the value of the real estate owned by Bear Stearns is seen as a sign that many of the financial assets Bear Stearns owns have a negative value.

Another interesting point is comparing Bear Stearns to Countrywide. Both were large institutions with exposure to the subprime real estate market. But Countrywide was seen as a free wheeling company that almost ignored risk and rose fast and feel fast. In contrast Bear Stearns was seen as an older company that had weathered through multiple recessions. But in the end the same market brought both these companies to their knees. Basically spreading out risk among many subprime borrowers does not help if the real estate market weakens resulting in a large percentage of borrowers going into default. Hopefully the collapse of Bear Stearns will serve as a warning lesson for future companies. And the warning lesson hopefully will not only be remembered only in bad times, when it is frequently too late, but in good times when the seeds are sown for future financial turmoil.

Ki is a real estate agent in Austin Texas. He works with buyers interested in investing in the Austin real estate market. His site provides a free search of the Austin MLS as well as a graph of recent mortgage interest rates.