The Federal Reserve Bank Steps Into Real Estate

The real estate market has taken a beating, but now there might be some light at the end of the tunnel. The Federal Reserve Bank has stepped into the real estate market in a big way. How big? How about $200 billion dollars!

The current real estate market is being hit by a number of factors that drag it down. Everyone knows about the foreclosures, but there is more to this factor than meets the eye at first. The problem is found in the secondary market.

Most mortgages are sold by the retail lender on a secondary market. Investors in the secondary market then administer the loans. This is why when you buy a home, you often get a letter indicating some company you’ve never heard of now owns your loan and you should be paying them. This secondary market is critical to real estate. Buy purchasing loans, the investors in it provide liquidity to the retail lenders you deal with when applying.

Alas, the investors in the secondary market have taken an absolute beating in the current real estate market. You’ve seen companies such as Meryl Lynch declare billions in losses. With these losses comes the removal of many of these investors from the secondary market. That means reduced liquidity and a credit crunch where retail lenders can’t move their loans and have no new money to offer to borrowers.

Well, the Federal Reserve Bank has taken notice and jumped into the real estate market with both feet. How? The “Fed” has teamed up with the central banks of Canada, Switzerland and Europe to provide over $200 billion dollars in financing to large investors in the secondary market. The Fed will loan this money in exchange for the bad mortgage debt the investors now have. Basically, it is a bailout by any name.

Why would the Federal Reserve Bank do this? Moreover, why would Switzerland, Canada and Europe’s Federal Reserve Banks get involved? In two words – the economy. The US is teetering on a bad economic spell. A bad recession in the US will have a major impact on the economies of these other countries and, frankly, you could have a world wide recession. In short, this move is being made to stop such events from happening.

Will it work? Well, you have to understand this is an extremely unusual move for the Federal Reserve Banks to take. They tend to view unwise lending decisions as the responsibility of the lenders and investors. Nonetheless, this mess is threatening the greater good economically, so putting $200 billion in liquidity into the market is certainly going to help.

Nobody knows if it will turn things around, but it certainly is a very positive step. If there is more money for borrowers, there will be more purchases. Real estate prices are very low now, so there are plenty of good deals to be had. Now that there is money to make those deals happen, the recovery of the real estate market may start much sooner than many think. If you’ve been waiting for the bottom, this might be it.

Get Free 1 Month Listing     Find FSBO Homes Here

Sign up for Newsletter

<< Back to Real Estate Articles