How will the $700 billion rescue affect you?

Friday, Oct. 3, 2008, will be remembered as the day the real estate market hit bottom and began the slow but inevitable turn from a "buyers" market to a "sellers" market.

The primary purpose of the rescue plan is for the federal government to purchase billions of dollars of non-performing mortgage securities or, in layman's terms, home loans in default, as well as existing real estate-owned inventory or, in again layman's terms, bank-owned properties, thus removing them from bank's and mortgage companies balance sheets.

The theory is that once these financial institutions receive this influx of capital they will be in a position to lend money to "credit qualified" borrowers, thus thawing out the credit market.

What this means for homeowners is that the government is required to do everything possible, including, but not limited to, reducing the principal balance of the homeowner's mortgage to reducing the interest rate to modifying the term of the mortgage, etc., to keep people in their homes.

Potentially, the government (FHA) will be refinancing owner-occupied distressed properties at 90 percent of appraised value amortized over a 30-year term at a fixed interest rate with a five-year pre-payment penalty provision.

The final details of the government's plan should be released within the next 30 to 60 days. A key point to keep in mind is whether the government will raise the cap on how much they will refinance from the current county by county basis (in Maricopa County the cap is about $346,000) or whether they will temporarily increase the cap to a number such as $530,000 nationwide, which by the way is the language in this past summer‘s Mortgage Relief Act.

The government's primary objective is to keep people in their homes and to end the cycle of short sales, foreclosures and vacant REO properties. However, if the cap isn't raised to an amount that will accommodate the majority of American's with mortgages in default, the impact of the rescue plan will be limited and may, in fact, not succeed.

After watching the second presidential debate this week it became obvious to me that this rescue plan may not do enough to address the root cause of the housing crisis. As a lifelong Democrat I must give Sen. John McCain credit for his proposal that the government spend an additional $300 billion dollars to finish the job of refinancing distressed home mortgages and keeping people in their homes. This additional influx of capital is absolutely necessary to stop the bleeding.

It is important to note that the government will be in no hurry to liquidate their inventory of foreclosed properties in the near future. The government intends to stabilize the real estate market, thereby encouraging prices to rise at historic rates closer to 3 to 5 percent per year.

If the government waits a few years to put their REO inventory back on the market, they will have an opportunity to recoup taxpayer money given the spread between what the government paid and what the properties are now worth.

What this means to buyers who have been waiting for prices to hit bottom is that between now and the first of the year is your opportunity to accomplish your goal. If you wait any longer, you will be paying more for housing after the first of the year than you would be paying today.

What this means for sellers is that beginning in 2009 you will be able to negotiate with buyers on a more level playing field given the fact that real estate prices will have begun to rise and the number of homes for sale will begin to decline.

I wouldn't anticipate much happening with this legislation until after the first of the year. The wheels of government move slowly even during a crisis and a new president takes the oath of office on Jan. 20, 2009. It took Congress and President Bush two weeks to pass legislation that they were told by Treasury Secretary Paulsen was over the weekend!

Jon Beydler is a 30-year Valley resident and the former mayor of Fountain Hills. He lives in south Chandler and is president and designated broker of Valley of the Sun Real Estate.