LEGAL NOTES

The Emergency Economic Stabilization Act of 2008, also known as “the bailout bill” that has gained a lot of media attention in the past few months, has Real Estate professionals contemplating its impact on the industry, local Real Estate markets, and customer confidence when it comes to buying and selling Real Estate in today’s rocky environment.

Most people agree that the current economic crisis stems in largest part from the housing market. Home values declined after an inflated Real Estate market took a nosedive and financial institutions suffered huge losses tied to mortgage-backed securities. Quick and easy credit, along with careless underwriting standards, resulted in subprime loans which destroyed securities backed by mortgages.

While many people are hopeful that the $700 billion bailout plan will help restore confidence in the economic system, others argue that it creates the expectation that our government will step in to rescue businesses and individuals after they suffer losses based on risky business decisions. Despite this rescue of the financial industry, many are also concerned that it will do little to ease lending standards so that more homebuyers can qualify for loans. However, by purchasing mortgages from banks and other lenders, the U.S. Treasury will have more power to reduce the number of foreclosures, which will ultimately control falling home prices.

While the bailout stands to provide some relief for homeowners in distress—for instance, modifying interest rates on high-risk homes—many are concerned that interest rate reductions won’t solve the housing debacle in areas where property values have drastically fallen. In such areas, foreclosures and short sales will need to be all but eliminated to make a difference.

Many experts believe that the government should do more to curb foreclosures than it has. The bailout fund, as it is now structured, may spend only a minimal amount on troubled mortgages. It appears that the language of the deal with the banks does not mandate them to use the money to provide credit. Some banks are even publicly stating that they will use the money to buy other banks. This clearly was not the intent, and therefore there are proposals in the works that may change this.

The federal government is now considering a plan that could better help Americans avoid foreclosures. Under this plan, which was proposed by the Federal Deposit Insurance Corporation, government agencies would use $50 billion from the recently passed bailout plan to guarantee approximately $500 billion in mortgages. The government would assume half of the losses on home loans if mortgage companies agreed to reduce borrowers' monthly payments for at least five years. By doing so, unaffordable loans could be converted into loans that are reasonable and sustainable for homeowners.

This plan could be especially helpful in states like Nevada, where the housing downturn is largely impacting the state economy. According to RealtyTrac, foreclosure filings in Nevada rose 137 percent from a year earlier to 13,022 in September of 2008. Las Vegas took one of the largest hits when it comes to metropolitan areas creating and sustaining jobs and creating economic growth, according to the Milken Institute. Las Vegas ranked 75 in 2008 after a ranking of ninth in 2007, freefalling 66 spots from just a year ago. By reducing the number of foreclosures, the state may have a better chance of stabilizing the market and overall economy.

The National Association of REALTORS® (NAR) and the National Association of Home Builders (NAHB) are proposing another stimulus package, which would directly benefit the housing industry. NAR wants the government to eliminate the need for homeowners to pay back the $7,500 first-time homebuyer loan that was part of one of the previous bailout packages. It has also asked that the $7,500 be offered to everyone, rather than just those who have not owned a home in the last three years.

In addition, NAR is urging the government to use a portion of the allotted $700 billion that was provided to purchase mortgage-backed securities from banks to provide price stabilization for housing. This would require using the newly enacted Troubled Assets Relief Program to push banks to make credit more available to consumers and small businesses, expedite the process for short sales, and expedite the resolution of banks’ Real Estate owned (REOs) properties.

Even if all these measures are taken, the harsh reality is that housing challenges are likely to continue over next few years, as many more subprime mortgages turn to high-interest mortgages and the economy struggles to recover. However, the good news is that the declining housing market has made homes more affordable in many areas, opening up many opportunities for legitimate buyers. Now, if we can get lenders back into the habit of lending to these good buyers, we can begin the slow road back to recovery.

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Disclaimer: The above is not intended to be, nor is it legal advice, and should not be relied upon for any reason. Even though this article maybe disseminated throughout the U.S., the material covers only Nevada law, and no other. E RealEstateExec and Exec MediaGroup, LLC expresses no opinion on any other state's law, nor about the handling of any particular legal situation. You should consult your attorney, accountant or business advisor before undertaking any action. No attorney-client relationship is created between E RealEstateExec, Exec MediaGroup, LLC and the reader.