My Question to you:

What can you do to get government and the taxpayers out of the process entirely? That is where the focus needs to be.

You wrote:
- Limit Federal Exposure for High Risk Loans: Mandate that the GSEs no longer securitize any unsound mortgages.

My reply as stated to you initially:
Better yet, how about not allowing GSEs to securitize anymore loans at all, with the ultimate goal of getting the government out of this business entirely?
The polls this week have been telling you repeatedly, this is what the American tax payers want. Will you please comply?

My friends and I have been discussing your letter at length on hotair.com
They like me feel the details you stated do not go far enough, becuase it fails to recognize where the responsibility for this problem lies.
We feel your plan only bandaids and perpetuates the current problem.

Let me be perfectly clear, it was not Wall Street that created this mess it was Congress and the federal government through those GSEs that did this. We the taxpayers do not want this process to continue. It must be halted. This is not the role of government. This corrupts government officials.
Compromise on this issue is unacceptable.

And who do we likely have to thank for the failure to introduce full socialism into the financial sector? John McCain and his ’stunt’; which is exactly why I think he did it

OT: Look like Joe Biden is MIA these days; is he dodging gaffes, or creditors?

From my research, there is $13 trillion in mortgages in the US, and half of that is within the Fannie and Freddie portfolio. There is an estimated $2 trillion in subprime, of which around 25% is late or in default. Not sure where the $700 billion number came from, but one would need to relate it to the numbers above.

I believe Paulson mentioned $14 trillion in his testimony. I’m not going to quibble over a lousy $1 trillion. It’s close enough for government work. $700 billion is 5% of $14 trillion. I don’t remember if he gave a specific number for the amount in default and foreclosure. Maybe he just wanted to keep the math simple. I guess he figures that $700 billion is what it would take to convert the aforementioned ‘illusion of money’ into the real thing.

All the government bids are going to do is raise the marks for those issues they participate in (well, at least after they make one transaction). You know what I mean.

Actually, that’s the aspect of the plan that I find most appealing. To the extent that it creates an active market, complete with greed and speculation, it moves back toward the capitalistic system that we all know and love.

The ‘loss’ of capital directly related to subprime mortgages is a loss of capital that never existed. The origination of these mortgages created the illusion of money much like the paper profits that were created by the tech bubble.

Well, that’s not exactly true. The loss is real, since the bubble wealth made its way through the system. Just like counterfeit money that’s been released into the system (and it should be legally treated the same way, IMO). But I haven’t seen any estimates of this, anyway. I would have thought that the expected loss would be one of the big numbers someone would throw up in committee when he’s asking for $700 billion.

The loss in value of viable mortgages bundled with subprime is an aberration caused by the mark-to-market rule. My feeling is that this would correct itself given time and elimination of MTM. Unfortunately, we don’t have time to wait for that to happen.

RedWinged Blackbird on September 27, 2008 at 8:58 AM

You know, that’s what I thought, too. But if it’s just a question of marking, then just changing to Newt’s moving average or something else like that should immediately relieve pressure, without any cash needed. All the government bids are going to do is raise the marks for those issues they participate in (well, at least after they make one transaction). You know what I mean.

I mean, I haven’t heard anyone talk about the actual dollar loss we are estimating (even just a ballpark in orders of magnitude) or the size of these markets we’re bidding into (well, there have been some stories about that). I don’t know.

The ‘loss’ of capital directly related to subprime mortgages is a loss of capital that never existed. The origination of these mortgages created the illusion of money much like the paper profits that were created by the tech bubble.

The loss in value of viable mortgages bundled with subprime is an aberration caused by the mark-to-market rule. My feeling is that this would correct itself given time and elimination of MTM. Unfortunately, we don’t have time to wait for that to happen.

http://blogs.knoxnews.com/knx/silence/archives/2008/09/hey_congressman.shtml

What Treasury will be buying is mortgaged backed securities consisting of ‘bundles’ of mortgages which include both good and bad loans. From what I’ve read, the average mark-to-market value of these MBS’s is in the range of 20-30% of the hold-to-maturity value, while the actual value is probably around 65% of the hold-to-maturity value. Obviously, the success of the investment will depend on how much Treasury winds up paying for the securities.

RedWinged Blackbird on September 27, 2008 at 8:19 AM

Right. But that market is far different, more diverse and larger than the underlying mortgages. It’s pretty weird, as far as I see it. I mean, I haven’t heard anyone talk about the actual dollar loss we are estimating (even just a ballpark in orders of magnitude) or the size of these markets we’re bidding into (well, there have been some stories about that). I don’t know.

Count to 10 on September 27, 2008 at 8:24 AM

LOL.

philwynk on September 27, 2008 at 7:48 AM

That is consistent with the calls I have read to ax “mark to market.”

progressoverpeace on September 27, 2008 at 5:30 AM

As I understand it, that number represents 5% of total outstanding mortgage debt and is the amount currently in default or foreclosure.

RedWinged Blackbird on September 27, 2008 at 6:55 AM

I read that the $700 B number is some kind of procedural maximum for a single government outlay, and that he basically just asked for the maximum he could get with one bill. I don’t know if that is correct, though.

So, if the government is going to use the money to buy homes that are not in default just to raise the value of the struggling bank’s assets, they’ll eventually realize a decent return from the money. However, if they’re only going to buy the loans that are headed for default, they’re going to lose their socks — which are really our socks.

What Treasury will be buying is mortgaged backed securities consisting of ‘bundles’ of mortgages which include both good and bad loans. From what I’ve read, the average mark-to-market value of these MBS’s is in the range of 20-30% of the hold-to-maturity value, while the actual value is probably around 65% of the hold-to-maturity value. Obviously, the success of the investment will depend on how much Treasury winds up paying for the securities. That’s why Paulson has proposed contracting with private firms to manage the portfolio. I plan to keep an eye out for any mutual fund managers who might be involved, as they might have an opportunity to snag some good deals for their funds, assuming that such activity is not prohibited.

progressoverpeace on September 27, 2008 at 5:30 AM

As I understand it, that number represents 5% of total outstanding mortgage debt and is the amount currently in default or foreclosure.

RedWinged Blackbird on September 27, 2008 at 6:55 AM

If that’s so, then we can forget profits from the government’s purchases. If what the government will be purchasing is mortgages on houses in foreclosure, then the government will be saddled with foreclosure costs. The normal return on a mortgage in foreclosure is something like $.40 on the dollar, even if it’s a perfectly good house.

Most people don’t understand — clearly Barack Obama doesn’t understand — that the problem is NOT primarily sub-prime loans going bad, the problem is really a severe drop in the value of homes that’s reflected in the books of financial institutions. Even with the high default rate of sub-prime loans, total mortgage defaults is only around 2%. The big losses are from re-valuing mortgage assets to include downside risk as required by FASB 157, which means that instead of reporting the face values of the mortgages, financial institutions have to report repo value — which is next to nothing.

So, if the government is going to use the money to buy homes that are not in default just to raise the value of the struggling bank’s assets, they’ll eventually realize a decent return from the money. However, if they’re only going to buy the loans that are headed for default, they’re going to lose their socks — which are really our socks.

If somebody can tell me where my analysis is wrong, I’m all ears, but from where I sit, that’s what we’re looking at.

progressoverpeace on September 27, 2008 at 5:30 AM

As I understand it, that number represents 5% of total outstanding mortgage debt and is the amount currently in default or foreclosure.