CHESSNOID

I was reading an Article in the NY Times called A Rescue Plan Without Taxpayer Money by By GRETCHEN MORGENSON.  In it she address some topics I have heard housing bust bloggers have been talking about such as the foreclosures and the impending tsunami of mortgage resets.

Securitization trusts hold $1.5 trillion of subprime and alt-A loans. As of late August, according to figures from the Securities Industry and Financial Markets Association, roughly $400 billion of the loans were delinquent and $1.1 trillion were current on interest and principal payments.

But that latter group of loans could become troubled as well if more borrowers become unable to pay (which rising unemployment figures suggest might be the case).

To make matters worse, many borrowers will face severe interest rate resets on their adjustable-rate mortgages next year and beyond. A new report from Demos, a public policy research group in New York, points out that millions of mortgages are ticking toward a possible explosion.

The report, citing data from First American CoreLogic, a real estate research firm, says $250 billion in loans will reset in 2009 and $700 billion in 2010 and after. If left on their own financially, many of these borrowers will be forced into foreclosure.

The government has not addressed this situation but that might be because the Bush White House is already out the door and his financial stooges Bernanke and Paulson have only mucked up our economy worse with their efforts thus far. They have bailed out Wall Street and basically wasted taxpayer money.

Paulson’s original idea to buy worthless mortgages was idiotic from the beginning, but he has at least abandoned that stupid idea.

When he first peddled the “troubled asset relief program” in September as a solution to the credit mess, he urged Congress to back the plan posthaste. But on Thursday, he scotched his idea of using even more of your billions to buy rotten mortgage assets from banks.

Looking on the bright side, there is something to be said for flexible responses to a complicated financial crisis.

But now that the original TARP design has been toe-tagged, and because there’s still another $350 billion left for Mr. Paulson to deploy, perhaps it’s time to consider actually attacking the root of the problem: falling home prices and rising delinquencies and defaults.

In this article, the author has also pitched some ideas from investment bankers that might help fix the situation or at least head off the future problems that will make this recession even more severe. I don’t know if these ideas will work but they are reasonable and deal with the cause of the problems and not just the symptoms.  Even if the initial ideas don’t pan out for whatever reason, at least it is headed in the right direction.

Still, there are many smart ideas floating around about how to solve the twin problems posed by securitizations and resetting mortgages.

One interesting idea was conceived by two veteran investment managers, Thomas H. Patrick, co-founder of New Vernon Capital, and Mac Taylor, a principal of the Verum Capital Group.

They propose refinancing all $1.1 trillion of the loans in securitization pools that are still performing but that may soon face punishing interest rate resets. Homeowners whose loans are in these pools would receive newly issued loans with fixed interest rates, currently 6.14 percent, and 30-year terms. Under this plan, Fannie Mae and Freddie Mac would issue debt to pay off the outstanding principal on the loans and then guarantee the new ones.

Voilà: Investors who own the underlying interests in the mortgages would be fully repaid and the securitizations would be closed out.

“Our proposal is based upon the fundamental principle that the only way to ameliorate the problem is to somehow improve the underlying collateral,” says Mr. Patrick. “It rewards those homeowners who have paid their mortgages and have demonstrated financial responsibility.”