Buy the Mortgages instead of the Mortgage Securities

[Waiting For Everyman]

Alan White
September 27, 2008

"Another Idea"

Instead of buying mortgage-backed securities from banks, Treasury could buy the mortgages themselves from the servicers of mortgage-backed securities at a discount via a reverse auction. As written, I believe the Paulson plan would actually permit this modern version of the Homeowners Loan Corporation. Here's how it would work.

...

How much would this cost? There are about 5 million mortgages now delinquent or in foreclosure, with perhaps another 2 million in danger. Let's assume half of those mortgages (3.5 million) would meet whatever standards the Treasury might set (occupied by a homeowner with a pulse, house is still standing, etc.) Let's further assume that the average balance is $250,000 and the average purchase price @ 80% is $200,000. Let's see, $200,000 times 3.5 million equals . . . $700 billion. Recoveries would depend on the reliability of Main Street in meeting its obligations, not the reliability of Wall Street.

http://pubcit.typepad.com/clpblog/2008/09/another-idea.html

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I hope that's what Paulson intends to do, but I doubt it. If Congress expects banks to modify mortgages voluntarily it won't happen, and the MBS structure makes it almost impossible to do legally except in bankruptcy, which is being made less likely to happen too.

5 million mortgages now delinquent or in foreclosure, with another 2 million at risk. Congress had better get this right - in a way that provides real help to almost anyone who needs it... or all this money will be wasted and accomplish nothing.

They need to be saying something about how these modifications will work, to everyday people. I'm hearing nothing about that. Why the vagueness and secrecy?

[RUMMYisFROSTED]

1. Been saying it for weeks.

[pa28]

2. Well that would make sense would it not?

For a good, concise look of at some of the actual issues driving events check this out:

http://www.marketoracle.co.uk/Article6495.html

It sounds like a sensible, real world solution would not be fast enough to prop up the multi-trillion dollar derivative markets underlying this mess. Note the chart showing how massively leveraged the investment banks have become in these instruments.

As usual we're getting a sales job from the Bush administration and hearing nothing about the actual agenda. The deal is going to be approved but I can't help feeling this is going to end up like the financial equivalent to the Iraq invasion.

[Waiting For Everyman]

5. These CDSs should all be voided immediately.

The is not enough collateral in the world to back them. They are phoney. Frauds. It will have to come to that eventually, it may as well be now. This is only tossing $700 bn into a black hole for no reason.

So void them all at once. Mark to market all at once. That way, everybody's the same. Then see who is left standing.

[Usrename]

9. gotta buy them all up in order to destroy the evidence of a crime

Like Author Anderson shredding the Enron files, only this time on a global scale.

[sandnsea]

3. There is help for homeowners

They will have the ability to rewrite the mortgages in question. When you buy interest in a bank, you buy securities. That gives you a stake in the bank, and as part of that, the government got the ability to negotiate mortgages.

In addition, there is already a federal mortgage assistance program.

[Waiting For Everyman]

4. Mortgage assistance currently is extremely narrow.

It only covers 2006-07 mortgages which are ARMS. This bailout directs homeowners into the HOPE program which covers only that. That does nothing for the majority of imminent foreclosures on mortgages originated earlier, which btw had nothing to do with this crisis - defaults mostly due to job losses, and higher-than-market interest rates due to bad credit scores from unpayable medical bills.

Why cover only these certain kinds of mortgages? A foreclosure is a foreclosure, no matter why.

[sandnsea]

6. They just expanded the program

And the reason the teaser mortgages are targeted is because those are the loans they pushed on people even when the people qualified for a 30 year fixed at the same rate.

http://portal.hud.gov/portal/page?_pageid=73,3947211&_dad=portal&_schema=PORTAL

[Waiting For Everyman]

7. Thanks sandnsea. The website directs everyone through HOPE Now, and

according to them, the program is no longer only ARMS. However, what they do is two things, which I had already done on my own: 1) contact the current lender to do a workout; and 2) submit to the current lender to do an FHA refinance. A lender can refuse both of those if it wants to, and the homeowner is nowhere. HOPE Now doesn't ask any other lenders other than the current one(s). There's nothing to "encourage" the lender to take one of those options, any more than there was before. It's up to the bank's whim, as usual.

Just as an anecodote I can report that I'm getting nowhere with any adjustment in terms or refinance (trying since May) because I have 50% equity - and my lender wants it.

They are only going to do what they're ordered to do. There's nothing to protect the homeowner, especially those who still have any equity. Most older people are going to fall into that group, as well as those slipping over the edge due to recent job loss.

All I can do is apply to more lenders for an FHA Secure loan on my own, and hope I get one... but the banks aren't doing any lending at all now, are they? (No, they're not, I already knew that b/c I've been trying.) So assistance is available as the FHA website says, only it's not.

[sandnsea]

8. I understand this is not a 100% solution

What I'm saying is that there is a program in place and while people are having a shit fit over the bail-out, I would bet you that 90% of them are clueless that this program even exists, or that improvements have been made to it. In fact, I bet a lot of the people griping about this bail out were griping about bailing out homeowners too, and would have no problem with taking 50% of your equity. They were nowhere to be found when an effort was needed to make this mortgage assistance legislation more beneficial, they never are. All they do is bitch. This Housing Act also includes money for the National Housing Trust for low income housing, and $7500 to help first time home buyers. Between that and the help it does give to some homeowners, it is a good start. If people really care, then they should care about making this bill better.

[Waiting For Everyman]

10. Agreed.

I only worry that the legislators are being told the homeowners are covered, when they're not. I think buying the mortgages would be much safer b/c then the Treasury would have the collateral. This way they don't.

It matters a lot. As it is, this bailout is going to go to the banks and do nothing to stop the foreclosures, and leave the Treasury with a bunch of paper. If the foreclosures continue, the paper will decline. It's a "lose-lose" instead of what could just as easily be a "win-win".

What could make it at least SOMETHING for Main Street, would be the bankruptcy re-write provision. There is no reason to oppose it which makes any sense. Without at least that in it, there is nothing worthwhile.