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Toxic Asset Plan For Dummies.

March 23rd, 2009 by James Venney
Categories: Home, Mortgage News
Comments: 2 Comments »

Toxic Asset Plan For Dummies Without getting technical and boring you to death here is a synopsis of how the U.S. Treasury’s plan to get “toxic assets” off the banks books will work.

· The Treasury will provide $75- to $100-billion to seed capital for public-private investment funds. These investment funds will combine taxpayer money with private capital. The investment funds are to be formed specifically to buy distressed loans from banks. The seed money the government will inject into these investment vehicles will come from the $700 billion financial rescue fund Congress approved last October.

· These investments funds will be able to use FDIC guaranteed debt to achieve a 6-1 debt-to-equity leverage ratio. That’s a sweet deal. If private investors and the Treasury each contribute $1 billion to the investment fund, that entity can raise up to $12 billion in FDIC financing to purchase $14 billion in loans.

· Under this part of the program, banks would approach the FDIC with a pool of loans they want to sell. The FDIC would offer financing and the Treasury would partner with private investors to bid in organized auctions for the loans.

· Since the sale of these “toxic” assets will be made through a competitive auction progress (one investment fund bidding against the other) a market for loans and securities that otherwise could not be traded will be established. The competitive bidding process virtually assures the government will not pay to much as they help banks shed debt instruments that are severely limiting the banks available capital. The leverage offered by government financing to private investors ratchets up potential returns into double-digit ranges with minimal risk. On its face, this is not a bad deal all the way around.

Sounds simple enough…right? For those of us in Miami and the South Florida markets the question is will this plan set the banks on the road to recovery. Perhaps this plan along with all the other actions being taken by the Obama administration in conjuction with improved housing market numbers will encourage mortgage lenders to start easying their distressed market policies. Only time will tell if this is the medicine that the Miami mortgage market needs but I for one am of the opinion that we will look back and see the “Toxic Asset Plan” one of the mile stones on our way to a more stable real estate market.

Feel free to share your thoughts and opinions on the topic.

This entry was posted on Monday, March 23rd, 2009 at 10:08 pm and is filed under Home, Mortgage News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.