Tyler also points to Mark Thoma who in turn points to a column by Sean Olender.But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.
The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.
A lot of these mortgages are defaulting within the first twelve months, and I've said before that back when I was at Freddie Mac (this was the stone age, when home owners actually had to put money down to buy homes) we presumed that anything that defaulted that early was fraud. It was up to the institution that sold us the loan to prove otherwise.
The difference between Freddie Mac and the typical private packager of mortgages is that Freddie Mac guaranteed investors against loan defaults, regardless of cause. If the loan was originated fraudulently, then that was an issue between Freddie Mac and the originator who sold us the loan. We tried to make lenders repurchase loans if we found fraud. Our loan sellers were representing to us that they had underwritten the loans properly. They were giving us a warranty that the documentation of the loan was accurate. These "reps and warrants" provided our legal basis for forcing repurchase.
Private packagers work differently. But somewhere in the process between loan origination and the owner of the mortgage-backed security, there probably are "reps and warrants" that have been violated. They could be small, technical violations, such as an inappropriate document used to verify income. Or they could be more egregious violations, such as falsifying the name on the loan application. A lot of those violations are from the loan seller to the loan packager, neither of whom currently bears the risk of the loan default.
Further up the food chain, there could be "reps and warrants" about the mortgage pools making up the securities that might provide a basis for legal action. That is, the packagers presumably have to make some "reps and warrants" to investors.
If you are an investor, I assume that the people you want to sue are the packagers, i.e., the companies that bought from the brokers and sold securities. But the problem there is that you are suing them on the basis of what they represented about their entire mortgage pool. It's not worth going through loan by loan. What you want to do is force them to repurchase the whole pool on the grounds that the violations of reps and warrants were systematic, so that the packager was deceiving investors. I have no idea how easy or hard this would be to prove. I have never looked at the offering circular of a private mortgage pool, so I don't know what the reps and warrants look like.
I just sat in on a conference call with the Treasury, whereupon I learned several interesting things:
1) The Treasury Department has its own conference call system
2) That system doesn't work very well
3) This is clearly an attempt to facilitate an orderly reorganization of the market; no one was able to offer high hopes that it would actually change much of anything.
The fundamental problem is that rising house prices have long eased the financial problems of Americans by allowing them to lever up when times got tough. But leverage has a nasty way of working in reverse: now housing is less a piggybank for those in temporary financial difficulty, and more of a millstone around their neck. The easy leverage that pushed up prices in the early part of the decade is now dragging them down, leaving a lot of people stuck in homes that they can't afford, and also, can't sell.
The Treasury plan will give many of those people breathing room. But it will not reverse the decline in housing markets. That means that there will still be a lot of people out there with negative home equity, and all the problems that implies. They are one move, one job loss, one setback away from disaster.
The question remains whether the Treasury should bail those people out more completely; and if a bigger bailout is needed, whether hte time for it is now. On one theory, a big, bold move has the greatest chance of success; on another, the earlier and the bigger your move, the greater the chance that you will do something spectacularly wrong. I'm tenatively of the Treasury's "wait and see" school.
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