From RGE monitor this morning:
- /Barr/Tyson: Saving America's Family Equity (SAFE) loan plan inspired by the successful Home Owner's Loan Corporation introduced in 1933 to deal with wave of foreclosures: Treasury and Fed would run auctions in which GSEs would buy mortgages at discount--> investors take writedown, improve their liquidity--> GSEs work with originators to restructure loans to prevent foreclosure--> only owner-occupied homes eligible, no speculators--> SAFE loans pooled and repackaged with government guarantee--> once market normalizes, SAFE ceases operation.
- FT: Dodd proposes $20bn to follow Alan Blinder, SAFE proposal for Depression-style mortgage refinancing agency (HOLC) operating with $200-400bn.
- Alan Blinder: Introduce government agency like FDR's Home Owners’ Loan Corporation (HOLC) to buy "old (or upside down) mortgages from banks -->nearly 20% of the HOLC’s borrowers defaulted anyway but HOLC closed its books in 1951 with a small profit. Likely scale of operation today: $200-400bn (see Pollock from AEI for details.)
- Baker: Upside down homeowners are actually better off if they walk away and rent instead, the only ones hurting are the banks--> The bank bailout crew wants to stop the bloodshed on Wall Street by having the government step in and either guarantee or buy up the bad mortgages.
They are really all the same idea and can be explained as such:
Housing is still in free-fall with horrible numbers as of this morning. Banks have recognized 120B of losses with at least the same to go (we are only half way). FED monetary policy is running out of steam (I don't fully buy that: 400B liquidity injection should stabilize M2, but I am following Goldman economist analysis) so fiscal/legislative has got to take over. Guaranteeing/Buying the loans that are down the toilet essentially stops the bleeding of the banks and socializes the losses.
The Depression era agencies took 20 years to unwind the mess, and showed a small profit at the end. I do believe as many commentators point out that the MBS market is oversold and represents a rate of default that is catastrophic. But really do I know better than the market? if the market is right, we are fucked anyway and the FED/Govt needs to step in now, if the market is slightly wrong then the FED/Govt needs to step in now and will turn a profit which would just be fair. If the market is wrong by a lot, sign me up to buy some MBS. Last time I checked in a private fund to go do just that, they charged hedgies fees (which I refuse out of principle) and so far (2 month into it) are down 15%, for a supposed return of 15%, ouch!!!