Signe

Alternative Bailout Plan: Good and Bad Ideas

The guaranty idea is superior to Paulson's Purchases for a myriad of reasons. I agree that it would a) cost much less -since the actual losses on such mbs will be much less than predicted. In fact, I have yet to read about realized losses i.e. foreclosure or short sale proceeds are not enough to pay off the original loan) associated with any investment grade bond.
b) it would be much easier to administer -GinnieMae, a division of HUD which currently guarantees certain mbs has the infrastructure to monitor and pay US government guarantees in the event of actual realized losses on mbs.
c) as guarantor, the US government would be in a position to offer individual borrowers relief, such as lowering interest rates, forgiving principal,etc. This would not be possible with Paulson's Purchase, as it is highly doubtful that all owners of a single mbs issue would agree to sell their bonds to the U.S. Treasury.
Note, I am not advocating that the U.S. Treasury offer borrowers relief, but a government guarantee as opposed to a government purchase gives us this option and therefore should appease those who think that victim borrowers are owed.