Chris B

Ten Banks That Will Be Hurt by the Takeover of Fannie and Freddie

If mortgage debt is so toxic, and is currently trading at a fraction of its face value, then why not offer homeowners the option to buy their debt back at a fraction of the eventual cost to them? Then the banks get to sell their debt at market rates and homeowners who have the cash get the bargain of a lifetime. I would happily buy back my mortgage for 8% below the balance of the loan. With a 5.5% interest rate on my mortgage, and the tax deduction worthless to me because I take the standard deduction, that would amount to a 13.5% gain this year for me. Likewise, because the market value of my loan is probably 10% below the balance of the loan, the bank would improve its position by 2% and, more importantly, trade debt for badly needed cash.

Of course, the homeowners who were unable to take this option would be the ones more likely to default, but that would be the case independently of what the better-capitalized homeowners did. At least if the better-capitalized homeowners could buy out their mortgages, the banks would have cash to operate and pay for the inevitable defaults from the other homeowners.