Treasury Turns Against Buying Bad Mortgages

By: ratetake

Treasury will not longer purchase bad mortgages from banks after all. Treasury Secretary Henry Paulson backed away from the long time awaited plan and suggested that Treasury will inject more capital into financial institutions.

Now that government will not buy banks' bad mortgage assets as originally planned further discouraged investors today as Dow Jones moved again into negative territory in the third day of decline.

Paulson said that the plan would have taken too much time, and that the Treasury instead will rely on buying stakes in banks and encouraging them to resume more normal lending.
There have been a lot of criticisms of banks receiving injected capital as they were buying other smaller banks and sitting on the rest of the cash, not lending. Lending guidelines has changed and banks will stick with those guidelines until market improves and since government is not purchasing bank's bad assets, they will not lend any time soon.

However, Wall Street analysts generally believe that the Treasury is now on the right path. In most cases banks need to survive and deal with their own problems when it comes to bad debt. With capital injections of funds from treasury banks can expand their portfolios, sell and package deals that can be sold to investors on Wall Street and than start lending.
With current, rather fast bailout plans announced earlier concern is that bailout money of $700 is being depleted quickly.

Paulson also announced a new goal for the program to support financial markets that supply consumer credit in such areas as credit card debt, auto loans and student loans. He said, "with a stronger capital base, our banks will be more confident" to support economic activity.

Treasury will now use the bailout money to buy securities backed by credit card debt, student loans, auto loans, housing and government agency debt. Paulson said that 40 percent of U.S. consumer credit is provided through such securities.

The new plan calls for buying some of these consumer-debt securities whenever the price fell far enough to push the yield up to a certain level. If government likes the yield they would buy those assets. These debt securities have a fixed interest rate, so their yield changes according to whatever price investors are willing to pay for them. Lower yields indicate stronger demand.

With this plan the price of securities will go up and yield would decline. Than the market for that security would unfreeze and allow consumers to get mortgages, loans and credit cards. With credit cards interest rates would decline.

Automakers are in a red zone and they need to turn their wheels into positive results. House Speaker Nancy Pelosi wants Congress to support a financial bailout for auto industry with $25 billion loan for General Motors, Ford and Chrysler.

Retailers such as Macy's announced loss of $44 million in the third quote. American Express Co. is said to be seeking about $3.5 billion from the government to help boost its balance sheet.

Currently there is approximately $1.4 trillion, or more than 10 percent of U.S. economic output in losses from credit markets. As the economy weakens consumers concentrate more on repaying debt that any other purchases.

New holiday spending projects some returns for retailers. But with already slashed prices retailers can only push so much.

Article Source: Loan Info Center

Susan Duey represents RateTake Refinance marketplace. RateTake matches consumers with multiple lenders offering low mortgage rate quotes. RateTake also operates Home Improvement Services

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