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Politics : View from the Center and Left -- Ignore unavailable to you. Want to Upgrade?

To: thames_sider who wrote (89278)	10/9/2008 10:48:10 AM
From: wonk	Respond to of 541988

For primary residences: individuals enter the scheme, and the Fed (via some intermediary, the newly nationalized Fannie and Freddie? agencies working at state level?) takes over some %age of their house, based on the mortgage amount (less any rolled-up interest). Fed pays a going interest rate, maybe not an inflated sub-prime rate but a standardised mortgage rate including capital repayment for the term of the mortgage. The owners continue to live there and pay the rest on the same terms. As and when the house is sold, the returns go to them and Fed pro-rata. If they stay to maturity then they own some portion of the house and pay a rental to the Fed on the residual, or they could take out terms directly with the Fed to buy the latter out once their own circumstances permit. The MBS keeps a fair part of its value, probably enough that most won't blow up. And although the Fed still adds a lot to debt it's spread over a ~30-year span, and it's getting an asset which should retain value afterwards. You are very close here. People are focusing on the wrong aspect of the problem: not the decrease in the value of the collateral, i.e., the underlying homes, but rather the ability of the borrower to service the debt. Most of the subprime and Alt-A stuff is in high rate, short term resetting ARMs. One could easily reschedule that stuff into 10 and 30 year fixed as long as the homeowner agrees to pay the note, and accept a lien on some percentage of future profits. Make the loan assumable (which is something that used to be standard in the US but has now disappeared.) The homeowner still gets the mortgage interest deduction and so it’s likely they are better off than renting. The property is maintained and we avoid the big and immediate cash loss on the existing notes, foreclosure, physical damage due to vacancy and neglect court fights and lawyers’ fees, etc etc. It’s a heck of a lot cheaper, and you let net present value or the time value of money work for you rather than against you. As you note with the speculators, I’m not uncomfortable with letting them burn. Bernanke is right in one of his implications. Get the market implicitly (if not explicitly) recognizing the mark to maturity value, get the mark to maturity value to around 80%, and the problem shrinks from a fraction of its present size.