What to expect from the bailout.

Implications: 1. Shows how truly bad the mortgage industry has gotten and how scared the feds are of where we are going. 2. If the major source of liquidity can not survive, who will? 3. What should be the outcome.

Analysis: The fear of the ongoing mortgage issues as well as macro economic issues pushed the Fed to act. What is not being said is that there was no way for Fannie and Freddie to stay capitalized in the face of ongoing defaults and risks. This is a huge statement that certianly questions the increase in the markets on Monday. So bond holders are a little more secure. The rest of the economic message was hold on to your hats. The values are driving to the lowest possible outcome through lack of intervention and excess volume of homes for sale.

If the two largest holders and ongoing makers of mortgage loans can not weather the storm then we have a far more serious issue than is being discussed. Who will make mortgage loans going forward, portfolio lenders, or possibly "covered bonds". The issue raises the question of how much will the Fed put into to bolster originations and workouts. Without the mass ability to refinance or provide financing the result will be that FHA, FHLB and FAFHA will be the majority funders of new loans. So much for jumbos and subprime loans.

Speaking of subprime and risk based pricing. Since when did pricing up for risk mean dropping economic reason. The issue in our defaults are that we priced high, well beyond the ability to actually pay on the loans, without looking at the ability to pay. Lending has to bring back common sense which is based on the front and back ratios and if you have a higher risk, then price higher but give them less so they continue to afford the property. Common sense died, is still dead and will not come back until both sides of the equation are met.

Finally, the outcome should be a discussion held, mandatory attendance for any planning a foreclosure action, by the securitized trustees, wall street banks, major lenders, investors, government agencies, bankruptcy trustees (DOJ and US Trustees),Hope Alliance and all other parties to agree upon workout resolutions, standard formulas for using them and applying them and turnaround time based on completed packages. That way a uniform message can be provided, borrowers will respond and a standard can be used to recreate a value to mortgages. If not the end result will be the continued foreclosure increases followed by a maximization of home volume to liquidate and a threshold home value that will be reached sometime in 2010 or begining of 2011. That is a long time for a serious depression.