Can the 75 Billion Dollar Bailout Stem the Flood of Real Estate Foreclosures?

I know that $75 Billion seems like a huge pile of money for loan modifications. Let's work some numbers and see how big the problem really is.

Let's say the median priced home in the US is about $240,000. According to the news, there are about $10 Million homes somewhere in the foreclosure process. So the idea is to give these qualified homeowners a loan modification to reduce the interest rate such that the new payment is 31% of their gross income, or less.

OK so the homeowner works on a loan modification, whereby the interest rate is reduced from a painful rate of 7-12 percent to a good rate of say, 4-5 percent. And the homeowner can qualify at the 31% level. The bank either piles the arrearages on top of the principal or they discount it.

Now comes the big challenge. It seems to me (and I do a lot of foreclosures), that the "value" of the property in foreclosure is conservatively worth about 30 percent less than the $240,000 owed.

So then we ask, are homeowners going to want a new $240,000 loan (that has been modified with a lower payment) on a property with a current value of say, $168,000?

Now we are back to where be started.

If the average $240,000 house in foreclosure has lost $72,000 in value, can the bailout money cover this for 10 Million homes?

Let's do some math:

10,000,000 houses * $72,000 lost on each home = $720 Billion Needed

Ouch.

So in gross numbers, it looks like $75 billion is about 10 percent of what could be needed to keep our current flood of homeowners in their properties.

The $75 Billion number equates to about $7,500 for each homeowner to have their arrearages adjusted (about 2-6 mortgage payments).

I wonder if the vast majority of these properties will head to the foreclosure process, after all.

The key point is to understand that we have to be ever more diligent on calculating the offer. Note, formulas used to calculate offers on long-term hold real estate are not at all related to fix and flip formulas, and these deals are normally disastrous for the unsuspecting investor.

We talk much more about this in the What2offer mentoring program. After years of doing these calculations by hand, my partner and I have developed an online real estate software to make our lives much easier. We can now crank out offers and determine the exit strategy in seconds.

To Your Success,

Tom & Svein