Not Enough....Not Even Close

Implications: The rate-freeze approved and being implemented by the government is not nearly the answer to the problems facing the Mortgage Industry, or the Financial District as a whole. The problem is systemic, and the solution is only one of a bitter pill to swallow.

Analysis: The problem is systemic: I have been saying this for over a year now. The band-aid to freeze the rates for "qualified" borrowers actually applies to only 15% of the Alt-A/Subprime mortgages that were originated from 1.95 to 12.07 (ARMs only): the rest will not qualify for a variety of reasons, either due to program limitations or delinquencies on their current mortgage in the last 12 months.

Besides portfolio performance issues, the investor community will not embrace rate-freeze due to the reduction in expected spread (WAC), and the proposed restructuring of the existing mortgages from ARM to fixed rates, which affects the Weighted Average Life. Institutions traditionally hedge the anticipated income derive from the MBS market with current fundings: a change in either side of the equation will greatly impact the quarterly performance for the financial institutions. Finally, the repackaging of the Mortgage-Backed Securities will require a leap-of-faith from the Investing Community to believe that an Assistant-Store Manager for a video store (true story) is making $85k per year. The halcyon days of loose underwriting for people who should not have been placed in the home they currently hold are gone, and the consequences could be dire if a restructuring package that mitigates the true credit risk (Borrowers) and the replacement risk (Restructured MBS issues) is not developed, and soon.

In conclusion, it is too little, too late to offer this salvo to resolve the issues at hand. The problem is too harsh to face completely: we have gone in too deep for too long. Only an unwinding of the mortgages for those who do not qualify for them, or a complete overhaul of the MBS issues, will bring a decisive answer to the difficult problems that are coming.