The Wilder View

The Fed just can’t get away from the itemized bailout

Here’s a way to reduce the size of your balance sheet: write down assets. According Bloomberg, that is what the Fed plans to do under the “Homeownership Preservation Policy”:

“The goal of this policy is to avoid preventable foreclosures on such assets through sustainable loan modifications and other actions that are consistent with the Federal Reserve’s obligation to maximize the net present value of the assets for the benefit of taxpayers,” according to the document.

The Fed’s “Homeownership Preservation Policy” lets the central bank or its agents “promptly” review applicable mortgages to determine whether the borrowers should be offered a loan modification, the document said. Qualified borrowers must be at least 60 days late on their payments.

And the itemized bailout continues. The Fed bails out AIG and Bear Stearns (and Citigroup), but leaves Lehman Brothers and Washington Mutual to fail. By extension, delinquent mortgage holders related to assets acquired through the bailout of AIG and Bear Stearns THAT ARE 60 DAYS LATE will be offered a loan modification.

I find it very hard to believe that (1) the Fed can get this program running smoothly in a timely fashion, and (2) the $74 billion of assets that may or may not be tied to 60-day delinquent mortgages will make a darn bit of difference.

The Fed should continue with its MBS purchase program, and leave loan modifications alone. The Fed acquired just $5.8 billion of MBS on its balance sheet since January 5, when the program got underway, or just 1% of the $500 billion allocated two months ago.

It occurs to me that the Fed may be going down the following path: it puts in half an effort into each program before dropping it for another “cooler and more effective” program. Fortunately, the money supply is still growing – the main reason that the Conference Board’s leading indicator rose in December – but unfortunately, I am becoming increasingly skeptical of the Fed’s ability to stay on its chosen path. And that is bad for credibility.

Originally published at the News N Economics blog and reproduced here with the author’s permission.

2 Responses to “The Fed just can’t get away from the itemized bailout”

AnonymousJanuary 29th, 2009 at 1:27 am

BY ANY OTHER NAME, THIS IS DISRESPECT AND ABUSE, OF TAXPAYERS AND SHAREHOLDERS- White House and Congress continue with misguided policies, and sloppy distribution of taxpayer money.

CJHamesJanuary 29th, 2009 at 3:38 pm

What am I missing here, Ms. Wilder? Forgive my simple way of looking at this, but isn’t this just a way for the Fed to try and fix these MBS’s on the cheap? If a homeowner has a $200k mortgage against a home now valued at $160k, wouldn’t that mean the Fed must only write a check (per se) for $40k, and not have to purchase the entire mortgage? Will they purchase the mortgage in full, or will the original mortgage holder retain what’s left of the loan?Seems to me this is the Fed doing what’s best for the Fed, which, I suppose, is fine. In theory it saves American taxpayers money and provides a greater use of capital, or printed dollars, whatever we are calling it these days.My main concern is this: fairness. Plain and simple, how is it that I could be on time with my mortgage – even though my house is clearly under as much water as everyone else in my neighborhood – yet the neighbor to my left and my right receive what amount to a $40,000 gift? Is my credit rating worth $40,000 to me? Add interest on that money it becomes, what, $50,000 over a 20-yr period? All I need to do to “make” an additional $50k is let my mortgage lapse beyond 60 days?One more caveat … I know full well, as a former S & L Exec – IF credit returns to “normal” – banks are going to line up to loan me money, even if my credit score has taken a 50-pt hit, and I know that over a period of time my credit score will go back up anyway. Where is my downside risk? Why shouldn’t I sign up for this program? Besides, I can put the $1500 per month mortgage payment into my pocket for two months.Hmmmmmm. This gets me to thinking ……

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