What the Federal bailout means to you

Mortgage and Lending with Waterstone Mortgage - The Wellington Group

Today is an historic day, with congress approving the much talked about Federal bailout.  While many media talking heads will lead you to believe that this will immediatly lower interest rates and make it easier to qualify for a home loan, I disagree.

The much talked about liquidity crisis is truly a crisis, and the cause of it is in large part due to the inability to sell mortgages.  Banks only have so much money to lend, and to maintain operations they must sell portions of their loan portfolio each month to continue lending money to new clients.  At the beginning of the mortgage meltdown last fall, it became harder to sell a mortgage than in years past.  As the problem grew this year, banks were stuck with millions of dollars in mortgages that they wanted to sell, but couldn't.  This lowered their ability to lend money, at first on mortgages, and as the problem persisted, for all types of lending.  Credit cards, auto loans, student loans, business credit lines, working capital lines, and many other types of financing have become difficult to obtain due to banks inability to lend.  The only consistent buyer of loans has been the Federal government through it's FHA program, and recently through it's takeover of mortgage giants Fannie Mae and Freddie Mac.

This bailout, in some form, was necessary, because businesses depend upon credit to operate, and without credit, they cannot remain in business.  There were too many jobs at risk for Congress to do nothing.  With the passage of this bill, credit will become more available, and businesses will continue their operations.

While this bill should open up credit for most types of financing, I see it having little impact on mortgage financing.  We had our mortgage meltdown last year, and credit has been tight ever since.  The government has been the main purchaser of mortgages for almost a year, and that won't change.  Whether this bill passed or not would not have had a great impact on people securing home loans.

I also do not see this having a major impact on interest rates.  Two opposing forces should cancel each other out, increased buying of mortgage backet securities, and inflation.  With the bailout, we will likely see foreign purchases of mortgage backed securities increase, but at the same time, we will likely see inflation increase.  The increased foreign purchasing of mortgages will lower rates, but inflation will pull them back up.  When the government creates 700 billion in new dollars, the US dollar weakens, and inflation rises.

The bailout has passed, but if you think it will change the home loan market, don't hold your breath.

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