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Bank Bailout Bill Explained

Before we try to understand the Bank Bailout Bill, we should know basically for what it was formulated. The main concern due to the economic downturn was the non-payment of mortgages, and due to the economic situation these mortgages have been written down in value. So even if there is foreclosure, the value will not be what it was actually worth, and also the loan cannot be resold, as there are extremely few takers.

The normal practice is that the bank will sell mortgage-backed securities to Fannie Mae, who in turn sells them to investors with a few modifications. This helps the banks to unload the mortgages and getting it off their accounts. The problem arose when during the boom in the real estate sector many banks gave loans without the taking any money down as they should have. The banks thought that even if there was a default in payments, they would sell the property and make a profit. This indiscipline backfired tremendously as there are now no buyers and also due to this they had to write down the value. This in turn caused panic among the banks itself and they did not want to lend to each other. Due to this panic the rate of interest at which banks lend to each other went skyrocketing. This in turn caused the interest on the adjustable rate mortgages and credit card interests to soar. All this put in a nutshell is that there are many mortgages facing foreclosure with banks not having a clue of how to recover what they have lent.

To curtail this cycle of economic downturn spiraling out of control, the Bank Bailout Bill was passed which will give a buffer of $700 billion to banks in the form of buy-back by the government of mortgage-based securities that are about to default. This bill will also help the people who are facing foreclosure through the Hope Now scheme. Hope Now is a sort of a joint venture between the government and lenders to help out the people under mortgage to make their interest rates more realistic and help them formulate a repayment plan which is financially viable by them. It also helps the people who have already defaulted in their payments to become current and join in a repayment plan, according to their financial capacities.

As further help the Bank Bailout Bill also has provisions for $150 billion as tax breaks over a ten year period. This money will provide relief to survivors of the hurricane, aid in research and development and extend the Alternative Minimum Tax patch. The Bill will also put in place a committee that will oversee the sale and purchase of mortgages by the Treasury. The Treasury will also have the power to negotiate a government’s stake in the equity, in the companies that receive the assistance from the bailout bill. Insurance also will be sponsored by the government for assets of firms who are in trouble.

The Bank Bailout Bill is an intense intervention in the financial system by the government with the intention of helping the taxpayer and curtailing the effects of the economic meltdown.

Tags: bank, credit, government, Insurance, interest rates, loan, money, mortgage, tax

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