Huge headlines, scary story lines, and big government moving at breakneck speed to shore up our economic backbone.  You are undoubtedly hearing about an eminent and massive move by the Federal government to finally get its arms around the national, indeed global, financial crisis. The latest courtesy of my friend and Branch Manager Paul Gonzalez at our sister company CW Mortgage.  

We are writing to you today to briefly shed some light on what this may mean to you and I.  It will be historic, with nothing in our Nation’s history to compare to it.  And this is going to happen literally in a matter of days.  

The Federal government appears to be preparing a new entity that will purchase most, if not all, bad mortgages that are currently on the books of lenders and banks, and possibly Fannie Mae and Freddie Mac.  The Federal Reserve, US Treasury, Securities and Exchange Commission, Congress and the Administration are feverishly working on this as I am writing this, and will continue through the weekend and into this coming week.

When a bank has a lot of bad loans on its books, it must set aside equal amounts of cash to offset the bad debt and protect its stockholders.  This is currently tying up tens of billions of dollars that could otherwise be pumped into the financing system. This has also caused, or been a primary factor, in the collapse of institutions including IndyMac Bank and Lehman Brothers, among many others. 

The intended effect of the Federal plan will be to free up huge amounts of capital that lenders and banks will again be able to lend as mortgages and other types of consumer financing. 

The plan will likely resemble the Resolution Trust Corp, or RTC, which was set up in 1989 to clean up the portfolios of bad debts that resulted from the Savings and Loan crisis of the times.  . All this is vitally important to you and I, and all  real estate professionals, and will warrant our close attention over the next few days and weeks. 

If such a plan is enacted we will expect to see investors and banks more willing to invest money into the mortgage financing system.  Increasing the amount of funds in the system should, over time, bring down the interest rate spreads and lower interest rates. 

In the short term, be prepared for wild swings in the stock, bond and mortgage markets.  Volatility will be likely rule the day until the global markets begin to sense greater stability and lower risks in putting money into the financing system.