Unless you live in a cave, you’ve probably heard about President Bush’s proposed $700 Billion (yes, that’s Billion with a capital “B”) buyout. There’s a lot of “gloom-and-doom” news reports about closed-door meetings, hidden agendas, higher interest rates, tougher credit approval guidelines and the like. But what most average Americans want to know is how it’s going to affect them. Here it is in plain English, along with ideas on what you can do to weather the storm.
Basically, the Bush Administration and Congress are suggesting that the US Government buy up $700 billion in distressed mortgages nationwide. This massive debt is the result of the housing market crash and mismanaged funds and credit ratings by senior executives. Although it would be easy to write an entire book on that subject alone, this is the simple answer. And it’s important to note that as a result of this buyout, it will become increasingly more difficult to be approved for credit, at least in the short term.
Who’s responsible to come up with the $700 Billion?
Although it looks like Congress will approve the buyout, they won’t be footing the bill. No, my friend, that’s up to you and me and the rest of the taxpayers. It comes out to roughly $2,500 a piece. To be clear, it won’t likely be a one-time $2,500 hit on your taxes – the proposal allows for it to be spread out a bit, and hopefully prevent it from being a burden to the average taxpayer. Nevertheless, $2,500 is a significant amount of money to most people that I know, so start saving now.
In the interest of being fair, the total amount may be less than $700 Billion – that’s just the cap right now. You see, after the Treasury Department buys the mortgages, it will turn around and sell them to investors (if you’ve got good credit and you’re optimistic about the plan you could be one of them), and it may not end up costing the entire amount approved by Congress. The Government isn’t just writing a check for $700 Billion, the proposal allows it to spend up to that amount. Any way you look at it, it’s still a whole lot of money.
So, as an American who is neither rich nor reckless financially, I’m being asked to bailout people that are?
The simple answer is, “Yes.” What’s in it for you, then, the average American homeowner of average income and spending habits? Well, it could end up saving your retirement or 401k. With the massive collapse of Washington Mutual last week, just about everybody’s financial future is uncertain. If you’ve got good credit, chances are, you’ll be just fine. If your credit is fair to poor, you may have a much tougher time of it. It’s speculated that foreclosures will continue to rise in the short term, so repairing your credit could save you not only money, but ultimately your house as well.
How is it that Congress can suddenly come up with $700 Billion when they haven’t been able to come up with even a fraction of that amount for healthcare, to repair bridges and tunnels, etc.?
It’s a good question, and one that I’m certain will be asked frequently in the months to come. The response from Washington is that although there are many other valid and worthy places to spend money, as a matter of national security and continuing our way of life, the financial system could not be allowed to collapse, no matter the cost.
How do I prepare myself for what’s next?
For the short term, clean up your finances and your credit. Reduce your outstanding debt as much as possible, and carefully evaluate any new applications for credit or major purchases. The goal for the short term is a financially protected and defensive position, while the long term may very well be financially lucrative to those who have the good credit to support them.