Morgenson -- Patrick-Taylor Plan; Lets Get to the Bottom of the Crisis

Fair Game
A Rescue Plan Without Taxpayer Money
new_york_times:http://www.nytimes.com/2008/11/16/business/16gret.html

By GRETCHEN MORGENSON
Published: November 15, 2008
HELLO, taxpayers. Worried about the fate of the $350 billion that the government has asked you to fork over so far to help rescue financiers from themselves?
Last week, Treasury Secretary Henry M. Paulson Jr. gave you every errant golfer’s favorite response: Oops! Mulligan!
While the government still declines to say exactly how it has spent your funds, or who all the beneficiaries are, Mr. Paulson conceded that his huge capital injection hasn’t persuaded banks to lend more money.
When he first peddled the “troubled asset relief program” in September as a solution to the credit mess, he urged Congress to back the plan posthaste. But on Thursday, he scotched his idea of using even more of your billions to buy rotten mortgage assets from banks.
Looking on the bright side, there is something to be said for flexible responses to a complicated financial crisis.
But now that the original TARP design has been toe-tagged, and because there’s still another $350 billion left for Mr. Paulson to deploy, perhaps it’s time to consider actually attacking the root of the problem: falling home prices and rising delinquencies and defaults.
Since the $700 billion TARP was funded, it has been used solely to shore up banks and other financial institutions. (An irreverent friend calls it The Act Rewarding Plutocrats.)
Treasury officials did move closer to helping consumers with a new plan floated last week aimed at offering $50 billion in loans to companies that issue credit cards, make student loans and finance car purchases.
Kind of interesting, isn’t it, that troubled homeowners are missing from the list of TARP beneficiaries and left to fend for themselves?
To be sure, private efforts to modify mortgages have increased recently; Citigroup, JPMorgan Chase and Bank of America have all announced plans to restructure troubled borrowers’ loans. So have Fannie Mae and Freddie Mac.
But these efforts are limited to loans that these institutions hold. They don’t address the millions of loans sitting in securitization pools, those profitable instruments cobbled together by Wall Street that are collapsing en masse.
Wall Street engineering has created an epic problem: restructuring loans bundled into pools of securities is much thornier than simply changing the terms of individual loans residing inside individual banks.
Not only do such changes require the approval of hard-to-identify investors who essentially control the mortgages, but also many pools were designed with rules that limit the numbers of loans that can be modified.
Securitization trusts hold $1.5 trillion of subprime and alt-A loans. As of late August, according to figures from the Securities Industry and Financial Markets Association, roughly $400 billion of the loans were delinquent and $1.1 trillion were current on interest and principal payments.
But that latter group of loans could become troubled as well if more borrowers become unable to pay (which rising unemployment figures suggest might be the case).
To make matters worse, many borrowers will face severe interest rate resets on their adjustable-rate mortgages next year and beyond. A new report from Demos, a public policy research group in New York, points out that millions of mortgages are ticking toward a possible explosion.
The report, citing data from First American CoreLogic, a real estate research firm, says $250 billion in loans will reset in 2009 and $700 billion in 2010 and after. If left on their own financially, many of these borrowers will be forced into foreclosure.
Still, there are many smart ideas floating around about how to solve the twin problems posed by securitizations and resetting mortgages.
One interesting idea was conceived by two veteran investment managers, Thomas H. Patrick, co-founder of New Vernon Capital, and Mac Taylor, a principal of the Verum Capital Group.
They propose refinancing all $1.1 trillion of the loans in securitization pools that are still performing but that may soon face punishing interest rate resets. Homeowners whose loans are in these pools would receive newly issued loans with fixed interest rates, currently 6.14 percent, and 30-year terms. Under this plan, Fannie Mae and Freddie Mac would issue debt to pay off the outstanding principal on the loans and then guarantee the new ones.
Voilà: Investors who own the underlying interests in the mortgages would be fully repaid and the securitizations would be closed out.
“Our proposal is based upon the fundamental principle that the only way to ameliorate the problem is to somehow improve the underlying collateral,” says Mr. Patrick. “It rewards those homeowners who have paid their mortgages and have demonstrated financial responsibility.”
Currently, with everyone worried about more losses, the securitizations are trading at rock-bottom levels.
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