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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: NOW who wrote (86669)9/25/2008 3:18:02 PM
From: rich evans1 Recommendation  Read Replies (2) of 116555
 
These mortgages are not worthless. The loan severity ratio is 50% on foreclosure recovery. Your CDO may be worthless depending on its priority in the tranches. And if its a second mortgage it is worthless. Every bank states it loan severity ratio. It averages 50% on first mortgages and 100% on seconds.
So 700bill rescue investments could do the job. Whether it does not depends on how good Treasury is in buying the paper so the Gov makes money. Generally according to Bill Gross and Warren Buffet, if you can buy all the paper on a group of houses at 65 cents on the unpaid principle, you can make 12% on your money and of course the gov cost of funds is only 2%.
This assumes a 40% delinquency rate and 50% recovery on foreclosusre. It is easy to run the numbers. The problem is you must collect all the tranches. Then you buy them all and controll the situation. The trustee of all the tranches must divy up the proceeds according to prioities in the instruments. A daunting task. Warren Buffet understands and thinks the Gov can make money if done right. But others say the Gov can not do it right. Buying direct mortgages is easier and I think the Gov will start with that. 65% of the unpaid principle balance should make them lots of money assuming 40% default, 50% recovery and 12% ROI.
Rick
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