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Foreclosure Moratoriums: It's Time to Get Real

The answer is to create affordability with a new functional mortgage product. The "problem mortgages" are primarily those with rate reset features. The best approach is to bring down payments by making the loans longer duration. The government should use the 350 TARP balance to give a capital backstop to Fannie and Freddie. Those entities should then offer "special mortgages" to all non-conventional borrowers (altA, Adjustable rate, interest only, etc.) Those loans should have a 45 yr amortization and offer a rate fixed for 15 yrs at todays rate (lets say, 5.1%). Only those who are not in default more than 2 mos and who can demonstrate an ability to pay the new mortgage would qualify. You do not look to LTV on the refinanced loans since you are simply replacing existing mortgages. No "cash out" financing would be allowed. The possible shortfall on future foreclosures of thes loans is guaranteed by the 350 B FNE, FME backstop created from TARP funds. You then get new performing loans. Much of the "bad" paper will be refinanced with performing loans which eliminates the old CDS and similar products, and allows a new round of functioning securitization of paper. The banks capital gets replenished and the fininancial system starts functioning again. Further, history shows us that in 10 years or so, real estate will have again staged a dramatic upswing such that almost all home values will exceed the values which existed in the recent bubble. Accordingly, the current paper losses form home value declines will diminish or be eliminated when the fixed rate runs out. If the housing market starts functioning again, most of these "special mortgages" will be paid off thorough a sale or refinance before the 15 yr reset occurs.

Paulson/Bernanke: $700 Billion at 'Hold to Maturity' Pricing

The true problem in the credit crunch seems to be the accounting rule requiring mark to market. By making people write down assets because there is a temporary markte lock up is ridiculous. Any asset priced a s if it must be sold tomorrow rather than in an orderly fashion (hold to maturity value discounted for market interest expectaions) causes the stated "value" to crater. Once the process starts, it snowballs. CDOs and similar products can not be valued because the market dried up. There is no market because everyoe is afrraid of what the "mark to market" requirement will do to their balance sheets. If we get rid of the "mark to market" rule, the market will return, and stabiltiy will come back to the financial markets. Such an approach avoids the need to have the government create and finance a market.