I'm still waiting to see what the details of the proposed $700 billion to $1 trillion dollar housing bailout plan are that our government bigwigs are cooking up. At this point in time I'm not even concerned with who did what that led to this and that, I just want to know if we're in for socialism or socialism lite, and whether this will be a perpetual program or something with a limited shelf life. I'm hoping for the latter in both cases.
So, until specific details emerge, this is what I hope it will turn out to be:
So the new agency comes online, and we'll call it "the Agency" for the sake of convenience. The first thing the Agency does it announce to lenders that they're buying non-performing and distressed mortgages at 80 cents on the dollar. The lenders can take it or leave it.
Now the owner of millions of mortgages, the Agency can alter them, in particular the interest rates of these mortgages. So then the Agency contacts the borrowers, tells them that they're back to being "on track" as far as the Agency is concerned with a new interest rate in line with that of standard 30 year fixed rate mortgages, with the loan to become a 30 year fixed, for the full amount of their original loan minus any principal payments already made. There will be none of this crap about lowering the amount of the loan to reflect deflated housing prices. The borrowers can take it or leave it (and leave their house).
Next the Agency announces to the debt market that it has 30 year bonds for sale offering a coupon rate that is slightly less than that being charged on the underlying mortgages, say one-half to one point less. Thus there is positive cash flow and some margin to protect against more defaults by irresponisble and stupid borrowers, enhanced by the discount at which the mortgages were purchased from private lenders.
Other than the fact that we tax payers are still on the hook should too many of these mortgages fail anyway (because the interest on the bonds must still be paid to the buyers of them), this could largely keep the vast majority of this affair in the realm of private money since the purchase of the mortgages was financed by sales of bonds, and because the interest and principal on the bonds would be paid by the homeowners in question.
With a few more simple rules for the Agency, this could be a one-time affair: the Agency absolutely will not be allowed to originate new loans, and it will only have authority to buy loans from lenders and issue new bonds for a maximum of two years. After that, it will administer the program until everything settles, then cease to exist.
As for the profits, the best I can come up with is to put them in a social security/medicare lockbox, a real one this time, with the punishment for politicians who raid it to be the loss of one's right hand (some drastic reforms for both of these programs like the one I've suggested before [Social Security: Just Enough Rope to Hang Ourselves With] would be a very welcome and smart addition, too).
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