Blog

Real Estate Investors… Watch the Treasury UPDATE

Well it’s official.  Part of the bailout funds in the stimulus bill are going to be creating a “Bad Bank.”  The plan would use government money to support private sector purchases of bad assets that are weighing on banks’ balance sheets and keeping them from resuming more normal lending.  This comes on the heels of a recent Fannie Mae decision to allow investors to own more than 4 properties, a limitation Fannie had rigorously upheld for a while.  The previous 4-mortgage limit rule is no longer in effect for investment purchases. 

As many of you are, I am also a real estate investor.  I watch the capital markets every second of every day I am awake.  For investment property, financing sucks right now (a nice way to put it) and you can’t blame it on anything other than the housing market.  The bottom line is that banks aren’t lending money right now because even if they got federal bailout money, they have a huge portfolio of mortgage backed securities that is hard to value, thus it makes raising money for future lending virtually frozen.  You can’t lend what you don’t have!  Tell that to the hundreds of banks who went under.

One things you may want to watch, though, is the Treasury.  The Treasury is looking to open an institution some call a “Bad Bank“.  A Bad Bank takes government funds and would buy these clogged (bad) assets and wait for the market conditions to improve before selling off.  All current debt for this institution would pretty much be considered “Bad” hence the nickname “Bad Bank”.  The purchase of bad security debt will lift a lot of book portfolio from many lenders.

Sure, Fannie Mae and Freddie Mac are funding homebuyers and refinancers, but the real squeeze is on the investors.  If an investor wants to buy a typical rental property, many banks are requiring as much as 50% down to get the best terms.  If you cannot put down that equity, be prepared to take a beating on the rate, pay higher fees, and have costly penalties.  When renting becomes a bigger option than buying for some who lost a lot of their net worths in a time like today, real estate investors are needed to provide for the rental market.

So will a Bad Bank alleviate the squeeze on real estate investors?  That is yet to be determined, but what it will do is free up a lot of portfolio money in commercial banks which in return would cause banks to revisit the underwriting guidelines for investment property.  Stay tuned to New Jersey Real Estate Guys for the latest updates on how this may or may not affect you.

Popularity: 1% [?]