Amicus

Here's the Financial Markets Stabilization Act We Should Have Seen

Feedback, for your amusement:

1. Keep people in their homes - good for the economy, good for a slow home-price adjustment process. Government offers terms to the existing lenders and 50% participation in home price declines. Government offers reasonably close-to-market terms for those with ridiculous sub-prime or alt-a loans.

The worst-case scenario for the mortgage pools behind a CDO, under this plan, is that it is converted into a government-backed, yield-enhanced bond at maybe 16%-22% off of original face value (based on home price declines of 30-40% and 90-95% of LTV assumptions) and with maybe a 4% default rate (those homeowners who cannot meet even the government's reduced terms).

This is a Brady plan for sub-prime and alt-A mortgage debt, focused on those near or at default, that doesn't promise no defaults, keeps people in their homes as long and as much as possible, and shares the burden between lender and borrower, circa 50% in the "workout".

2. No "loan modification". The lender chooses to accept the governments (generous terms) or the risk of a costly, lengthy foreclosure process, as well as the associated home price risk. You can bet that, until house prices stabilize, most of them - well, their servicing agents - will go for the government terms.

4. yes and no. A limited amount of direct assistance, but it is better to get people jobs and to target stimulus to other things, than to start subsidizing lending.

5. absolutely not. For a time, the economy can run with ... less capital.

6. yes, but have no faith that "smart regulation" is ever anything that would make it to a final Congressional Bill.

7. We've done what needs to be done to supervised mortgage lending, but doubling the watch, so to speak, on all these other kinds of abuses, including a look at bankruptcy "relief", is probably a GREAT idea.