Should the inevitable bailout be limited to mortgages for private homes

[ThomWV]

There are rumors of the sorts of things which might be included in the bailout that Congress is now working on; student loans, car loans, commercial property, probably loans for vacations at Disneyland for all I know.

So here is the question, should the bailout, when it is finally written, be limited to addressing only shaky mortgages for private single-family homes bought by individuals or should the door be held open to allow a wider variety of bad debts to be addressed?

[AndyA]

1. It has to end somewhere.

Car loans?

Plastic surgery?

Vacations?

New drapes for the living room?

I actually think this "bail out" should help pay off mortgages. The people who own the homes benefit, because they have no house payment, (or a much smaller one), which gives them more cash to go out and spend to stimulate the economy, the financial companies benefit because they have loans being paid off, and our money will at least do some good that the people of this country can SEE first hand.

Oh wait...that would actually help the American people...can't have that...my bad...:eyes:

[ThomWV]

2. I might be able to live with widening the scope but hard assets would have to be involved

With bad mortgages at least you know somewhere there is a hunk of dirt involved and that some day it can (and will) be sold but with a bad debt on a vacation loan, well, not a hell of a lot of collateral involved on that one.

[HamdenRice]

3. It should be limited to mortgages, but it's not possible to separate things like vacation homes

That's because the bailout has to be done through surgery on the securities -- on a series by series and tranche by tranche basis. The securities are bundles of thousands of mortgages.

So the feds will call (actually make an offer) for something like Acme Mortgage Trust Series Z, and will try to get every single security in that series. This is maybe $300 million in $10,000 denominations. That's a lot of securities. That series could be backed by a mix of primary residences and vacation homes. There may be modest family homes and mcmanions. It's how they were packaged that will determine what properties get included, not anything the feds can do.

But no, this should not include all the other kinds of asset backed securities like credit cards and student loans.

Commercial property is a tougher call. Some of it may be mixed in with residential, but I believe that generally they were segregated from residential in separate series.

But the liquidity crisis isn't about the underlying property; it's about the marketability of the security.

Certainly commercial property should not be part of the bottom end assistance to borrowers.

On edit: changed $300 billion to $300 million. Typo- None of them were anywhere near that big.

[ThomWV]

5. Let me ask ....

It is so pleasing to see a response from the one person on this board who actually knows what is going on.

Are the tranches simply a mix of paper with similar risk or maybe I should say with each of the loans in its mix of about the same risk?

This seems to me to be the head of the pin, the end you want to push on. Those tranches have to be broken up and the elements examined if anyone really wants to know what their marketability is - or so it would seem to me.

[HamdenRice]

6. My impression is

-- and I should say I've been out of the business for almost ten years and keep up by reading so I no longer have inside info -- is that initially they tended to be similar geographically.

As the system got bigger and the demand for mbs more rapacious the mix of mortgages became more indiscriminate.

Moreover, in recent years, the packagers were intentionally mixing risky and non-risky according to statistical models.

A few days ago, DUer, acibiades_mystery, who is in the business of writing mbs registration statements made an important point: The contract requiresments are so severe that a default in one tranche or series can trigger a default in another series, even if it is perfectly fine.

In other words, to save money, the banks creating mbs would use the same vehical over and over -- the Acme MBS Trust, for example. So if Series 1 is fine and series 2 goes into default, series 1 automatically goes into default even if all the mortgages in series 1 are performing fine. That's called a "cross default." So in that way good stuff was contractually completely mixed up with bad stuff even if it wasn't pooled with the bad stuff.

[El Pinko]

4. Nice loaded poll.

No to mortgage bailout, no to corporate bailout.