Where is the Money Going?

I’m having trouble understanding this bailout business and I cannot find an explanation anywhere. Apparently a lot of other people are having trouble understanding this as well.  My confusion relates to the claim that the problem is due to the foreclosure crisis and that at least $700 billion dollars is needed to fix it.

The total amount of troubled home loans is $112 billion. This at least was the number bandied around over the last year. It was that portion of Washington Mutual’s portfolio that brought it down. The Wall Street Journal this morning reports that Washington Mutual has $30 billion in bad loans that will be written down with the purchase. What are these loans? Are they not home loans?

From published reports just paying off the home loans would have rendered Washington Mutual highly solvent. If the government stepped in and paid them all off, what would we use the remaining $588 billion for?

Furthermore that does not take into account the collateral for the loans. If we were able to recover just one quarter of the amount for which the collateral had been orginally valued, that would reduce the cost by an absolute minimum of $28 billion, leaving a cost to the tax payers of $84 billion. It is likely that more would be recovered so that the actual cost would be around $50 billion.

Either the total amount of troubled home loans is more than six times greater than previously reported or there is a lot going on that I have not been able to find explained.

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One Response to Where is the Money Going?

  1. Anurag Gaggar says:

    I think the $112 billion number came in somewhere in March and the situation might be worse than what they might have assumed earlier.

    “A study by Cagan released March 19 states that, over the next five years, there will be 1.1 million foreclosures on adjustable rate mortgages nationwide, totaling a $112 billion loss to lenders and investors, spread out over the period.” — The number seems to be based on 1.1 million anticipated foreclosures.

    “Foreclosures hit another record high in August: 304,000 homes were in default and 91,000 families lost their houses.
    More than 770,000 homes have been repossessed by lenders since August 2007, when the credit crunch took hold.” — It seems the number might end up a lot higher, based on more recent data.

    Still, the lack of detail in the proposed bailout package is surprising and the way they have worked up the size of the bailout is shockingly funny.

    “It’s not based on any particular data point. We just wanted to choose a really large number.” — Treasury spokesperson to Forbes.com on the size of the bailout ($700 billion)

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