The Fed Rescue Plan could be a boon for RE

In today's unsettling financial and real estate markets we are all looking for something to give us confidence. Todays announcement of the bank bailout should be just that.

Real estate values and transactions have been crippled by the lack of credit available to potential buyers. The reason for this credit crunch is due to the banks apprehension to add more loans to their books because of the losses that they have due to loans that are in default. When the banks look at the underlying value of the loan collateral and see that they have loans outstanding that are worth more than the value of the real estate collateral, they need to reserve capital in case of a default. This adds to less liquidity for the bank and therefore less capital to lend. These bad loans are reffered to as illiquid asstes.

Hank Paulson's plan is to have Freddie Mac, Fannie Mae and the Treasury Dept take these illiquid assets off the bank balance sheets. If this plan is structured correctly we could see the credit markets open up and lenders having the opportunity to start over using prudent underwriting to make loans. This should bring the transaction volumes up and we should see a bottom in real estate values. So lets keep our fingers crossed that Washington is able to make a quick decision for a solid rescue plan.