CNBC: U.S. May Back $600 Billion on Troubled Home Loans

Some may say "well they finally got around to addressing the mortgages themselves" but lost in the summer and fall of bailouts - people are forgetting the U.S. already committed $300 Billion to a home owner bailout this summer. It was supposed to help 400,000 people - you never really hear about that program anymore - I wonder where that $300 billion disappeared to. I tried to search on the blog via term 'bailout' to find the post that explained this summer's program but too many entries were returned; if that is not a sign of the times I don't know what is.

So this one is going to be sold as a bailout to home owners but effectively its a bailout for mortgage holders - i.e. those stupid enough to buy these "AAA" rated instruments as nearly risk free ways to get premium income. Really besides being unfair to those who did the right thing as home owners, it's not going to work for a great many people - many who got homes in this era should never of gotten them whether at 5% interest or their newly ballooned 12% interest. I read this past weekend that under current loan modifications the mortgage owner reverts to default within months 1/3rd of the time. So we're just doing more kicking the can down the road and wasting all of our money doing it. So we'll "bailout" hedge funds, banks, investment funds by backstopping these mortgages under the wishful thinking that the vast majority will stay in home (as unemployment ramps in the next year) and keep paying and we'll just take minor hits; when the reality is we're going to be on the hook for some major losses instead of the original investors as people who are going to default, in most cases will do at any rate. That's my take anyways - whatever cost is associated with any program I'm tripling.

• US regulators are working on a new federal program that could provide government guarantees for up to $600 billion of home mortgages to help prevent foreclosures, a source familiar with the discussions told Reuters on Wednesday.
• The plan, being hammered out by the Federal Deposit Insurance Corp and the U.S. Treasury, could provide guarantees for up to 3 million at-risk mortgages, said the source, who spoke on condition of anonymity because the program is still being discussed.
• The plan would provide federal guarantees to entice lenders to ease the terms of troubled mortgages—something that lenders have been reluctant to do on a large scale so far. The expected cost to the government would be a fraction of the value of the guarantees, as the intent of the program is to prevent defaults on home loans. (yes, except when the home loan does default - then whose on the hook - you guessed it. So that "fraction of the cost" turns into "the full cost" very easily. But you can't say that when you are selling the program)
• The program would be managed by the FDIC and would be available to banks, savings and loans, investment funds, hedge funds and other mortgage holders, the source said. It would encourage the lenders to rewrite the distressed mortgages, converting them into affordable plans. (#1 will taking a loan from 9% interest rate to 6% really make it affordable to most? #2 as home prices continue to fall, will all these people who are the main target - the 2003-2007 crowd of mortgage holders - want to stick around in homes where the mortgage is in excess of the home value? #3 so we're going to bail out investors as well? because in 2005-2007 in many of the high appreciation states ala California, Arizona, Florida anywhere from 25-40% of purchasers were investors #4 if you plan to rewrite the value of the mortgage down to current prices, then what happens when prices fall an additional 10%? A new rewrite i.e. new losses for government? #5 - oh nevermind, no one listens)
• The source said that under the program, the government guarantees would include second loans on homes, such as home equity lines of credit, so that lenders would not lose any money in a mortgage modification. (that's just scary - those with second loans and HELOCs are among the most extended and likely to default by inference that they took 2nd loans and HELOCs out in the first place)

This actually might help credit markets because it basically backstops CDOs (if it were large enough) but it's not going to help a lot of the people in the program in my opinion, other than to forestall the inevtible for 3-9 months. But that's ok - as long as the investors are guaranteed we're all happy here.