Government Takeover of Foreclosures Cures Economic Ills

The fed is now moving to set up a corporation to take foreclosures from the banks to clear up the banks balance sheets.  Lets call it the FRC, the Property Recovery Corporation.  I imagine the PRC will buy properties for cents on the dollar to give the banks back some capital. Now, the banks are carrying them with zero value on their books since the loan is non-performing.

 

There are conservative estimates that there are $500 billion in bad loans the banks have on their books.  Based on the lending ratios this means the bank cannot loan 10 to 15 time that amount out in loans to businesses and consumers.  Hence the current credit crunch, where there is money everywhere but none to borrow. 

 

Now, say the PRC buys the property from the bank that is the tied to the non performing loan for 40 cents on the dollar loan amount.  The bank now has 40 percent of their lending power back on that loan.  Do that all across America and the banks will have $200 billion back on their books and can make loans on that amount.  The credit crunch somewhat clears up.

 

The PRC will have a cost of operation to hold and sell of 20 cents on the dollar of their assets, so the breakeven that they would have to sell the properties they take from the banks would be 60 cents on the dollar.  This arrangement could actually make money for the fed, by selling above the acquisition, holding and selling costs. 

 

In summary, the banks become more liquid so lending loosens up, and properties are sold more uniformly so the severe downward spikes of property prices would level off. 

I’m all for the PRC.  It would make a good investment if they sell shares.

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