One question I get all the time from investors is why aren’t the lenders lending, especially if they got all that TARP bailout money? The answer is quite simple if you understand the complications of the issue. So let’s break it down.

First of all back in the good old days last year, financial institutions were required to maintain 10% liquidity compared to the bank’s assets in order to borrow from the feds to create new loans. Today the fed rate for banks to borrow money for the purpose of lending to consumers is around 0.00% (Zero). So if the lenders can lend at 5-10% and their cost of the money is nothing, they would be able to make a huge profit on the interest spread. It is a banker’s dream come true.

However, after TARP and the financial crisis that started last fall, the federal regulators increased the banks 10% reserves regulation to 12% so that the banks would be healthier incase of default. At the same time, everyone’s credit has been capped or closed all together. And the hardest hit segment was the small business sector. This includes a sole proprietor all the way up to a small company with less than 50 employees. Small business represents the largest source of jobs in the country.

With some many people being laid off and credit being shut off, we have been forced to live off of our cash reserves and now many of us are living off our cash as it is earned so our bank savings accounts, money market accounts and checking accounts have less cash in the banks. This has dropped the banks liquid reserves from the old requirement of 10% down to probably 7-8%.

So banks now need to increase deposits from us by 4-5% or sell off assets to increase their liquidity levels to the new higher 12% regulation. This has created a vicious circle were the banks can not lend to us, which forces us to use our cash now rather than leave it in the banks which further decreases the banks liquidity reserves to assets ratio.

To make matters worse, government is doing everything it can to stimulate the economy and prevent further market corrections. But until the market corrects itself, the banks will not be able to lend to us, and until they can, we have no choice but to live off our cash rather than deposit it in the banks for more than a few days at a time.

The market will correct itself despite the government, but the more the government does, the longer it will take. Many economists, and amateurs who have studied this situation, like myself agree that if the government would have just left the markets do its thing, we would have already seen the bottom of the market and the banks would just now be at a lever were than could start freely lending again.

Apparently So. Recently President Obama signed the Fraud Enforcement and Recovery Act. It also expands the justice department’s authority to prosecute mortgage fraud. See report from CNBC available at . Mortgage Daily News

With the current housing and financing situation in the US, it is not surprising that some have resorted to fraud. It is things like this that give the industry as a whole a bad name and I do not pity those who are involved. The need to be dealt with and I hope they get what is coming to them. The quicker we can take the trash out, the quicker the markets will start stabilize.

All the experts are saying that we are seeing signs of a recovering in the housing market and the declining in the number of lender mitigated sales (foreclosures and short sales). However, what they are not talking about is why?

Back in November, Fannie Mae and Freddie Mac had a moratorium on foreclosures through the first part of January in hopes that the TARP bailout funds would relieve homeowners in default and lenders with all those toxic assets. When everyone realized that the TARP funds were never intended to help out homeowners, the incoming president, Barack Obama stated that the first thing on his agenda was his stimulus package and that was going to save America. So Fannie Mae and Freddie Mac re-instituted the foreclosure moratorium to see what affect the stimulus package was going to have on homeowners in default and the lenders with all those toxic assets.

It soon became obvious that the stimulus package was not intended to stimulate the economy or save America. So Fannie Mae and Freddie Mac removed the foreclosure moratorium in March. That was roughly 4-5 months with virtually no new foreclosure filings from the two mortgage giants. That is why we are seeing a decrease in foreclosure sales right now and why the experts are saying that we have reached the bottom.

There are other reasons why we are seeing what looks like a bottom right now as well.

• Real Estate Values have plummeted in the last 6-9 months or so. This has cause a lot of people who would normally have listed their properties to step back and wait to sell.
   
• The $8,000 first time home buyers tax credit has drove a lot of new buyers to the market right now, before the credit end on December 1, 2009.
   
• Real estate investors who still have the ability to purchase properties have been very active buying up good deals on foreclosures.
   

These reasons and more have caused a decrease in available inventory and an increase in number of buyers. Talk to anyone who is active in the market today, and they are facing multiple offers on good deals.

All this activity is the reason the experts are predicting that we have reached the bottom of the market and that we are in the recovery stage. I hope that I am the foul and they are right. Because I think we have only seen the calm of the eye of the storm. I think that later this year, we will see a huge number of foreclosures hitting the market and the first time home buyers will be out of the market when the $8,000 tax credit expires. I also believe that with all the stimulus and spending that the Obama administration is doing will prolong the housing recovery with all the job losses and the massive tax increases, if they get everything that they want passed.

Later this year and the first part of next year will be a great time for investors. I think there will be plenty of inventory to chose from and a lot less competition in the market. I think that we have only seen about 25% of the total number of foreclosures as a result of our current economic situation.