Wednesday, March 4, 2009

Some Days I'm Right, So How Come I'm Not Rich?

Once upon a time, before Obama was elected, before Paulson bamboozled Congress into giving him TARP, I wrote a blog, which I'm adding to my Archives on this site, suggesting that the way out of the mortgage debacle would be for the government to buy up mortgages on the cheap, renegotiate them to payments that homeowners could afford and, at the end of the day, make a very nice profit on taxpayers' money while keeping hundreds of thousands of homes from going into foreclosure. Today The New York Times has published an article describing how former executives of Countrywide, the mortgage company at the eye of the current storm, are buying up and renegotiating defaulted mortgages. Just as I suggested, these guys are paying around 20 cents on the dollar, offering the homeowner a fixed rate at around 5% (which the homeowner gratefully takes to avoid foreclosure) and earning around 25% on their money. See

Yes, the story gets a headline because its about how the bad guys who started the problem are now profiting from their misdeeds. But there are other players in this game. The former head of the Federal agency that cleaned up and sold off assets from failed Savings & Loans in the 1990s is now working with a vulture fund buying up toxic assets and getting a good return. Yes, evil rich people are going to get richer. So, what else is new? But part and parcel to these deals is that its the sort of relief the housing market needs. Remember, this isn't a morality play, its about making money from real estate, one of the most amoral aspects of life on this planet I can think of.

So the real question for you and I is whether, when these renegotiated mortgages are securitized (bundled into a new security backed by the mortgages) and offered to us at 40 to 60 cents on the dollar (more than doubling the original investors' money while still offering us double digit returns), do we buy? I don't know. This is why my Financial Advisor gets the not-so-big bucks.

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