Summary of Solution to Clear MBS from Bank Balance Sheets
The Thrust of this proposal is for a new financial instrument MBS Economic Freedom Bonds. Under this proposed program, the Federal Reserve would fund private financial firms to purchase whole mortgages, private label MBS and MBS derivatives, clearing them from bank balance sheets and establishing a robust market for these illiquid securities. There is an automatic mechanism to recapitalize the banks with common stock as banks sell MBS securities at below book value and decrease their Tier 1 Capital. These MBS assets will later be re-securitized in government guaranteed bonds to remove them from the Fed balance sheet.
Foreclosures accelerate the falling prices for real estate and mortgage backed securities and are causing a vicious cycle of distress throughout the financial system. Mortgage foreclosures and write downs of mortgage debt deplete Tier 1 Capital which reduces bank lending. This leads to reduced business activity and increased unemployment which leads to further defaults and foreclosures. As foreclosures increase and neighborhoods deteriorate and unemployment rises, the damage will likely be more than economic.
Foreclosures are an economic root cause of the falling market prices for real estate and mortgage backed securities presently causing distress throughout the financial system. Foreclosures of homeowners depress the US housing market and lead to the deterioration of neighborhoods. This becomes a vicious cycle leading to further distress for the financial system and the economy, increasing unemployment, bringing about more foreclosures and a deeper recession which will trigger another systemic risk to the financial sector from credit default swaps.
The issuance of US Treasury First Lien Mortgage Notes would provide an effective, fiscally prudent and politically popular approach to stabilize the prices of mortgage backed securities. These notes would contain fully collateralized, transparent and uniform loans that provide work out capital directly to distressed homeowners. Banks will issue and administer the government backed loans, […]