Rather, it needs to put in place a plan that makes it possible for homeowners who are in danger of defaulting, to readjust in such a way that they can continue paying without failing. That would cost the government some money, but nowhere near the full cost of a default.
What is the homeowners incentive to continue to pay, aside from sentiment?
More importantly, you cannot adjust the terms of a securitized mortgage without the consent of the security holders - so we're right back where we started. Either the fed takes those securities under its roof, (which would allow it to change the terms of a given mortgage, if it chose) or it does not, and issues periodic by fiat changes to the assets (mortgages) underlying the security. This is not, I suspect, an actual recipe for stability, especially since those changes can be pretty much guaranteed not to happen in a short time frame.
I think there's also a key question - are you proposing to support those mortgages at whatever dollar value they stand, or write them down to the asset value of the collateral? In the former case, you've still got the fed on the hook for the difference between the dollar guarantee and the underlying asset value - potentially huge given the number of mortgages out there, and basically a giveaway to the banks and security holders anyway. In the latter case, you're back to the current buyout strategy anyway, except instead of cramming an write down on the security holders and then taking away the securities, we cram a write down on the security holders and leave them with the securities, which they'll be forced to hold for even longer, since the payout periods of the underlying mortgages has on average grown. Might be more viscerally satisfying, but won't solve the liquidity issues underlying the freeze.
no subject
What is the homeowners incentive to continue to pay, aside from sentiment?
More importantly, you cannot adjust the terms of a securitized mortgage without the consent of the security holders - so we're right back where we started. Either the fed takes those securities under its roof, (which would allow it to change the terms of a given mortgage, if it chose) or it does not, and issues periodic by fiat changes to the assets (mortgages) underlying the security. This is not, I suspect, an actual recipe for stability, especially since those changes can be pretty much guaranteed not to happen in a short time frame.
I think there's also a key question - are you proposing to support those mortgages at whatever dollar value they stand, or write them down to the asset value of the collateral? In the former case, you've still got the fed on the hook for the difference between the dollar guarantee and the underlying asset value - potentially huge given the number of mortgages out there, and basically a giveaway to the banks and security holders anyway. In the latter case, you're back to the current buyout strategy anyway, except instead of cramming an write down on the security holders and then taking away the securities, we cram a write down on the security holders and leave them with the securities, which they'll be forced to hold for even longer, since the payout periods of the underlying mortgages has on average grown. Might be more viscerally satisfying, but won't solve the liquidity issues underlying the freeze.