Whose loss is it, Banks or Investors?

Implications: 1. While the article does a good job of pointing out that the losses will be greater under the House FHA Plan than expected and that the tax payers will carry the cost, it along with the plan by the House  misses the mark by thinking banks will take advantage of the plan. 2. The real owners of these loans are the investors, not the banks. 3. The investors are already not doing short sales, why would they take 40 and 50% losses under this plan.

Analysis:  Lets get something straight, Bank of America, Wells Fargo and Countyrwide (for the most part), do not hold very big mortgage portfolios. Those they do hold are mainly prime loans with a Private Wealth Unit backing. The bad loans they do hold are those that they could not originally sell. In the case of Countrywide that is a bigger percentage but in the national picture these protfolios are small. But please stop referring to the "Banks, Lender, and Servicers" taking these hits, the loans are not on their balance sheets!

The group that owns these loans and is subject to the large write down without recourse as proposed by Mr. Franks and the House are the investors who bought stake in traunches of securities.  These are hedge funds and direct investors like TIAA-CREFF and state retirement and pension funds along with insurers and foriegn investors. I do not think that is the group that congress want to force to take significant charge -offs and the foriegn investors will just laugh at the idea. 

I can just see Mr. Franks explaining to his own state Attorney General and the state citizens that the reasons the teachers pension and state employee pensions are down and payouts are reduced is becuase he did not realize they owned loans.  That will make for good drama, unfortunately a number of retirees may then lose their homes, I wonder if Barney can come up with another plan for them.

Currently B of A, Wells, Countywide and others are taking over three months to approve short sales. They need to get the investor apporval first and why would the investor do it. Currently, they can defer the charge off until liquidation and under most securities they get a monthly advance of interest (interest is paid on a scheduled basis and principal on an actual basis). So Mr. Frank wants them to accelerate their charge off, give up cash flow and have no recourse. I do not believe the tax payer is going to get hit that hard becuase vey few investors will approve a short of the 40 or 50% magnitude this proposal promotes. The "Law of Unintnded Consequences" is in full swing with this proposal, it shouldbe entertaining.