Two parts here: Mortgage, and not much of a Bernancke Put
1. Mortgage is still a work in progress. I fully expect that most aspects of the bailout will be extended to many of the 2 million or so homeowners.
Speculating a bit here -
FHA will guarantee mortgage payment. So the FHA pays your mortgage - but the homeowner now owes the FHA. Maybe at zero or much lower interest, but not a total free lunch.
Waiving the 3% down payment means that the FHA can do this for no down payment loans.
Notice no mention of FannieMae or FreddieMac yet.
Open question : Does this apply only to owner occupied houses, or will it help the housing speculators ?
For places like Detroit, chances are good the owner is in Alberta or Texas where they can find work, and not waiting to be rehired by the auto companies.
There is an IRS tax change so that loan forgiveness related to housing will not be counted as income. That will facilitate renegotiation.
There's more needed, and lots more details.
For the holders of sub-prime and the various CDOs, this is pretty good news. The FHA guarantees will reduce defaults down to a level closer to what the models expected. This should bail out 99% of the AA tranches that might be in money market funds. I will bet the bailout will increased until that happens. The next question is the lower rated tranches - will they 70 cents on the dollar or 90 cents or 97 cents ? That question is wide open, but maybe most of the A rated gets about 90 cents.
This will also bail out the mortgage insurers - maybe not 100%, but they will avoid bankruptcy. They may have a change in management, however.
There will be lots of holes - houses bought by the undocumented, speculators with a dozen houses, people who vastly overstated their incomes, etc.
The various CDOs will still stink, and it may be 6 months or longer before they will be tradeble at 85 cents on the dollar. So the hedge funds and other entities will be punished for buying this crap, but not killed in many cases, if they only had a little sub-prime.
2. No Bernancke put - There is some talk out of Jackson hole saying "maybe no rate cut September 18".
Notice that gold did not make a huge move.
The talk is that the FED will not move until there is actual recession where output from the real economy drops.
The FED will keep financial markets functioning - but that does not mean saving the bonuses of Wall Streeters. |
