CHRJR

Proposed Solution for Toxic Assets Plaguing Banks

Most proposed solutions this problem are based on overcoming the lack of a market price for CDOs and packaged bundles of mortgages sold around the world. Why not fix the value of the underlying mortgages and the CDOs would then have known market values market values?

If the FDIC bought ALL problem mortgages over the next 3 years before they entered the foreclosure process at 90% of face value with a limit of, say, a $70,000 cost per mortgage, it could then do two things. One, if a new mortgage could be crafted to keep a homeowner in their home, it would do this. The new mortgage would be for the original face value. The new mortgage could be for 30 years at an interest rate of, say, 5%. This would prevent foreclosure in many cases where resets at interest rates of 12% or more force the foreclosure. The FDIC would then bundle these "good" mortgages and sell them to Fannnie or Freddie or any other buyer. The FDIC would make back the 10% discount in value when it bought the mortgages and this would cover its transaction costs. This would set the value of all CDOs at 90% of face value, or more depending on the percentage of potential problem mortgages ubderlying the CDO.

Two, if the homeowner could not qualify for a new mortgage, the FDIC would initiate the foreclosure process and recover as much of the value that it could. Average house prices ran about $245,000 at the peak and have come down by somewhat over 20%, so far. Assume that the mortgage was for 100% of value. The FDIC would buy the mortgage for about $220,000. Suppose the amount recovered in foreclosure was 70% of face value, or about $170,000. The average net loss would be about $50,000, plus, say, $10,000 for transaction costs, or $60,000. If there were 1,000,000 such mortgages per year, the net annual cost would be $60 billion. This is peanuts to the sums being talked about these days. In any event, it would also value all mortgages at 90% of face value an dthis would stabilize ALL CDOs and bundles at 90% of their face value.

This plan would solve the mortgage problem worldwide and overnight when the program was announced. It would restore massive amounts of capital to banks balance sheets, instantly, and they could give back much or all of the TARP funds now being provided. All this for a cost of only $50 billion per year for the next 3 years, or a total of $150 billion. This should be compared to the costs to be incurred under the recently passed so-called stimulus bill for billion of dollars for things such as rapid transit from Los Angeles to Los Vegas.

Why the FDIC? Because it knows how to liquidate bank assets effectively and efficiently. This is its job and it knows what to do.

What is wrong with this idea?

chrjr

Housing: Is it Going to Get Worse Before it Gets Better?

In case you have not noticed Big Brother is cutting short term interest rates aggressively. The end point, some say, will be 2% or maybe 1%. This will boost the economy if credit of any kind is available, which may not be the case. Meanwhile, long rates are going back up. This seems to be an attempt to solve the housing crisis through cheap credit which would stimulate demand and constrain sinking house prices. It might work. However, the result of creating a new bubble on top of the existing bubble may well lead to an economic disaster the likes of which we have never seen before. Remember the economic maxim that prices always revert to the mean - eventually.

What the Housing 'Apocalypse' Prophets Aren't Revealing

Reading these comments is like listening to the uninformed blather to the ignorant.
Here is what is going on, if anyone is observant to notice. (The big boys are not always wrong.)
The cut in rates has reduced the bases on which the 1.9 million subprime ARMs are reset (prime, libor, etc.) to the point where most, or many, ARMs are at about breakeven. That is, when they reset mortgage payments will not increase. Some (Merrill) are calling for another emergency rate cut before the FED March meeting. With another .5% cut, when ARM rates are reset the payments will be LOWER in many cases than present payments. And this will enable many who can qualify to get long term financing.
When the toxic waste mortgages now in CDOs become valuable, the CDOs, which are now valued at perhaps 40 cents on the dollar, will increase in value to perhaps 70-75 cents on the dollar. Investment banks may then have to WRITE UP their value, which will restore a lot of much needed capital. Financial markets will recover and much of the mortgage related distress which we have been enduring will disappear.
If you do not believe in this scenario, what do you think the reason for the rate cuts is? To placate Wall Street and/or Main Street?