Bank bail out plan, doesn’t sound good for the borrowers, again.

I predicted this a few months ago, reminding everyone what happened in the late 80’s when the FDIC closed down over 700 banks in both Texas and New England primarily, then “gave” the “orphaned” loans to the Resolution Trust and Recoll, to liquidate.

The net result was an enormous shifting of wealth and property and the wholesale liquidation of homes and businesses as non-performing or undervalued notes were called and foreclosed on, without borrowers having an opportunity to refinance because of the same issue, declining value of the asset.

I warned everyone that two banks were closed and 10 were on the watch list reminding everyone what happened historically. A few months later I warned my readers again citing the closed bank list shooting up to ten and the watch list growing to 119. The handwriting was on the wall I told you and gave you the strategies required to prepare yourselves for this situation should it affect you.

It has now officially happened. As we all know, the government has arranged for $700 billion dollars to bail the banks ot of their bad loan situation. To be used to purchase non-performing or undervalued loans this time, not to close out entire banks, although this will also occur.

The rules of the new game have not yet been revealed to us, as our government leaders are busy making them up now. However what is most foreboding is the suggestion that they will model their workout plan loosely after the previous Resolution Trust/Recoll plan…and that’s the worst news possible.

Even if they create a new liquidation plan, the results are likely to be the same. Based on non performance, (failure to remain current with your loan payments) or worse, technical default, meaning if your loan collateral is now worth less then the allowable ratio to the value of the note, 80%, they will call the note as it is deemed inadequately collateralized and thus subject to foreclosure.

Of course as in the last horror show, in the 80’s, there is no real opportunity for traditional refinancing out of the government bail out plan as the property will appraise for less then the allowable ration to the note and thus the refi will not work, cannot rise enough capital to refi the note elsewhere and save the property.

Even though the resulting foreclosure will yield even less then the current value, and despite this making no sense at all, this is what happened the last time, and they are talking about doing it again this time…we shall see.

Perhaps they are a little smarter this time around, although based on our being in this situation, again, it appears there is little evidence of intelligence in our leadership adequate to appropriately resolve this problem without trashing the borrowers.

What to do? We must wait to see what the geniuses come up with in their bank bail out plan, and based on the new rules of the game I will provide a workout scenario that will save the day…stay tuned. Call me for help, 413-549-2966