Be Careful What you ask for you might get it.

Implications: It looks like the legislative solution is not getting off the ground again as far as working out loans. The proposals that have come out are mainly directed at going forward purchasers, builders and cities. So much for the defualted borrower. The ideas that were being floated carried their own risk.

Analysis:  There have been several different proposals sent up the pole to see how they will go, they are 1. Federal Intervention by an RTC like institution 2. A FED / HUD FHA bailout involving defaulted borrowers if the lender will reduce the balance to market. 3. A Partial Insuring on the reduced value to protect further decreases. 4. Funding refinancing in full 5. Moratoriums on Foreclosure 6. Covering all Loans 7. Not covering speculative loans. Dodd, Clinton, Ombama and McCain all have indicated some level of intervention but none of them understand some basics that will prevent their plans from working and will actually make them look very stupid as each attempt to date has done. Consequence 1. 1. The lenders can not make these concessions. They do not own the loans. The small town in Norway owns a portion of the loans from a traunche they bought into. They do not even own specific loans for them to give permission on. The Trust manages the loans in the traunche, they have assigned the loans to a servicer, the servicer must perform as outlined in the pooling and servicing agreement as established by the investment bank and the securitizing originator in the Purchase Agreement. This ownership issue is why suggestions and programs in the last year have failed. The rate freeze and the FHA Secure all require the concession of the owner/ investors, not the servicers who agreed to them. I have actually had servicers tell me that they would us my company or the Hope Alliance if they could determine how to pass the fee to the Investor. This is quite a "Catch 22" when you realize most investors would like to workout as many loans as possible to avoid losses. To make matters worse, if the servicer, Chase, Bank of America, Wells Fargo, etc agree to do these deals without the approval of the Owners the resulting consequences could be devastating and I for one will set up some investors to make hay on it. 1. If the lenders/ servicers agree to do these actions and reduce principal to allow a short refinance, then the owners can go back to the trustee and require a repurchase or that the Trustee make them whole. The Trustee and the owner/ Investor can go to the Investment Bank and claim a Securities violation of Reps and Warranties. 2. The Investment Bank is going to go back to the originators and hold them responsible. 3. The Insurers will also have their out against paying claims for violations of contracts and reps and warranties. 4. You can not have an RTC organization when they can not take over the loans, they are not taking them from the servicer/ lenders, they do not own them and the loans are not on their balance sheet. So the RTC will be taking away assets that belong to TIAA-CREF, the City of Cinncinati, The state of New York Retirement fund, etc. These are not actions that are going to make any candidate look good. End Result: The very same institutions that the FED is trying to prop up, Investment Banks and Lending Institutions, will be the victim of the change and have to absorb the losses with the resulting international financial system failure. Do you see state Attorney Generals letting this opportunity slip by to recover state losses on their investments? Consequence 2. Performing loans that are underwater will also try and qualify. What borrower who has seen his home's equity disappear and guestions why he is continuing to pay on it, will not do what he can to qualify for a lower payment. This will completely invalidate the agreements above and will also expand the amount of loss being incurred. Is the Government ready to cover $2 trillion in lost equity. Consequence 3. The reason that security owners are not jumping on the bailouts is that they are getting paid their interest by the servicers until the loan is liquidated or it is determined that there is no equity left. When the loan is liquidated they receive the outstanding principal less expenses. Given the longer and longer periods to liquidate that will continue to grow, the owners can avoid/defer losses because they are still getting paid. In addition, even 75% of the sub prime are paying still and they do not want to see the number get smaller or have to realize losses sooner, both of which they would have to do if they take the short payoffs to allow government refinancing. Consequence 4. Adverse selection of pools will occur. Good paying borrowers are going to jump at the chance to go to lower rates than they contracted to pay. Thereby leaving those loans that can not perform on the servicers books and the investors' pools. All level of securities will be wiped out and losses will be realized immediately. The end result could be driving the market to take all $2.4 Trillion of lost equity as a loss instead of just the delinquent losses. There is a way around this, but it involves a different audience than the ones the FED is talking to now. It also involves a different strategy that segments the types of borrowers in to those with primary residence issues and works out their loans based on their situation. The correct audience 1. Trustee organizations 2. Investment securitizing institutions 3. Insurers 4. Investor owners (Fannie, Freddie) plus large players like TIAA-CREF and others who hold substantial securities positions. These groups need to meet, determine and agree upon the solutions to be offered and the mechanisms to be used to reach the borrowers and resolve the loans. There are other alternatives that allow borrowers who can afford something to keep the home, make payments and catch up. For those that can not afford to keep the homes, then there are ways to liquidate those homes that reduces cost and credit impact to the borrower. To put it simply, the country can not afford a $2.4 Trillion refinance plan of all defaulted borrowers and lost equity. The country should support plans and actions that manage the situation and resolve loans in the best manner. These solutions exist and there are several groups, including ours, working to make them happen, but they can not be a Band-Aid that will fail in the near term or reward irresponsible behavior either on the part of the borrower, the lender, or the investor.