Since the announcement of this rescue package, I've been trying to figure out if the markets are in the midst of a liquidity crisis. The markets worked on September 12, 2001. They didn't work very well in October of 1979 and again in 1987 (what's next month?). I just checked the funds rate, and overnight has averaged less than 2% for the last month or so. Seems to me, that if there was no liquidity, the funds rate would be higher. I have no idea about what's going on in the bond market - governments seem to be functioning just fine but I don't know about corporates and we all saw what happened to stocks today.
The more I think about it, my idea about doing a gigantic REIT would seem to have merit. The problem is, that the property underlying the defaulted MBS is not likely to come back to a value anywhere near the principal balance of the mortgage secured by it. If there are houses in the collective collateral pool that continue to be occupied, that implies that there is some ability to generate cash flow. Maybe not equal to the P&I necessary to amortize the loan according to schedule, but some. If the bailout is equal to the difference between the whole huge monthly P&I payment and what homeowners can afford to pay, it's likely that the total amount that the government will end up paying would be quite a bit less than $700 billion.
Somebody is servicing all of these loans. In the documents there should be information related to the mortgagor's income - not all of these loans were no-doc. A simple calculation by the servicer tells us what the borrower can afford to pay. That becomes their new P&I. The difference between that and the original payment is what the government subsidy ought to be. That gets the mortgages back on a cash flow basis.
As for the loans that have already defaulted ... there's not much that can be done if we assume that a third party has purchased the property. The original homeowner still has their obligation to pay the loan and the title holder who foreclosed has gotten some cash out of the sale of the property. Therefore, the original homeowner's debt has been lowered and the proceeds to the sale passed through to the trust that is secured by the mortgage. So, there is debt, but no cash flow.
Maybe I'm taking to simplistic an approach to this situation. But, if logic has anything to do with finding a solution, shouldn't it be getting the underlying mortgages back on a cash flow basis?
Something else I'd like to know - which institutions are getting the proceeds of the bailout and what are they giving up? Lehman, AIG, Merrill, Bear, WaMu and a few others have written their junk down to zero. What percentage of the mess did they own? Can there possibly be an additional $700 billion out there that has no cash flow? Why won't a REPO type deal work?
WILL SOMEBODY PLEASE TELL ME WHAT'S GOING ON?
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3 comments:
Yes, indeed, where did all that money go? Let's see
if one party, a bank say, bought a security, then, well,
there's another party, MR. MONEY, who sold the
security at a huge profit. So, please tell me, who
exactly is MR. MONEY??
Me!
Harry, I have emailed you an article which seems
to explain what is going on. Basically, the
problem is with the fed and the banks,
NOT the economy which is not in such bad
shape after all. Congress will just screw
things up more according to the article.
Cheers!
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