Re: OT: Thoughts on current US Economic condition

Jim Thompson wrote:

[snip]

If you use public funds to refinance individual mortgages, you have two
problems: 1) If you only refinance owner occupied homes (cutting off the
real estate speculators), you leave lots of bad paper in the mortgage
market. 2) If you refinance all defaults, you cash out both the low risk
slices of CDOs as well as the high risk ones. Banks hate refinancing,
because they like holding (good) mortgage paper on their books instead
of cash.

Personally, I like a version of #2. Refinance owner occupied homes
_before_ the owners are evicted. The government can take part of their
$700 billion and go into business writing their own mortgage paper. If
the current debt is higher than the market value, write a fixed rate
loan for the market value (or 80% of it) and a second, reverse mortgage
for the difference. Have the government 'sit on' the reverse mortgage
and even allow it to be assumed as the house is sold for some period of
time.

For second homes, wait until they go into foreclosure and then have the
government pick them up outright and pay off the loan. They can then
offer them as rentals, rent to own, or whatever program fits the market.

In either case, the public will (eventually) get its principal back.
Even if they take a paper loss on tying up that cash for a decade or
so.

Wall Street would hate it, because they want to unload the risky paper
while hanging on to the low risk bits. A refinancing scheme would put
cash into their pockets which they would have to reinvest*.


Cripes! The end of the world must be eminent! I actually agree with
Hovnanian, AND his version #2 ;-)

I think you switched your meds with mine. ;-)

The reason I think it will work is as follows: If the gov't starts
refinancing mortgages, that means the 'good' CDOs (the low risk slices)
will get paid off along with the bad ones (the paper that gets hit by
the first few defaults). The banks, investors, and Wall Street want to
keep the good paper on their books much more than they want cash back.
Look at how they are screaming about the possibility of judges stepping
in to rewrite mortgages. Option #2 sidesteps the judicial interference,
using the existing re-fi processes.

If they start seeing the mortgages being refinanced, they will bend over
backwards to keep that from happening by propping up the CDO markets on
their own. As some of their cash comes back in, they could be
'encouraged' to participate in a (sane) re-fi market on their own.

--
Paul Hovnanian paul@xxxxxxxxxxxxx
-----------------------------------------------------------------------
Have gnu, will travel.
.

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