Why the Fed's Help Won't Help

Implications: It is wonderful that President Bush's plan to help the disenfranchised keep their homes, and in some (albeit, few) cases, this program will work. But like the cut in the commercial lending rates, this is more symbolic than helpful, and the true problems will persist after the assistance package is complete.

Analysis: On August 30th, President Bush called for limited help from Congress to to assist in the 'soft-landing' of the eminent foreclosure crisis that is rearing its ugly-head. The relaxing of some FHA underwriting standards, along with the urging of lenders to forego future profits to save their deteriorating Balance Sheets will no doubt be of some assistance. Unfortunately, the truth of the matter, which no one on Capitol Hill seems to either want to address or is willing to address, is the fact that many of these loans were made to people who either could not document their income, or grossly overstated what they actually earned. As such, neither Fannie, Freddie, or the FHA can or will be able to help: the estimated market for these mortgages range anywhere from $250B to $750B in originations. This figure is staggering, and evidence of the systemic issue that we, as lenders and consumers, created. 

The proposed assistance package would only be useful for those who can document their income: with the restructuring of 2-/3-yr ARMS into fixed rate mortgages, the burden of proof for documentation is needed by the borrower, which will not be forthcoming. The secondary market, which readily feasted on issue-upon-issue of MBS securities market for the Alt-A products are no longer available: the restructuring of the existing securities IS ESSENTIAL to this plan. Without it, all that's left is the goodwill of the White House trying to put a band-aid on a major head-wound.

A workable solution would be the repackaging of the existing securities, with the implicit support of the US Treasury in the form of a surety-wrap bought by the guilty parties who are looking for some form of bailout (e.g. Countrywide, Washington Mutual, Wells-Fargo). While this plan would certain erode the institutions' profit margins by increased investment costs, the long run would definitely be beneficial by the reduced amount of foreclosures and delinquencies.