Thursday, February 14, 2008

Here Comes the Federal Bail-Out

I always assumed there would be a federal bail-out of all the poor performing mortgages. I am sure this has been mentioned in the press previously, but this article from Yahoo is the first one I have seen. For those of you who do not remember the Resolution Trust Corporation (RTC) formed in 1989 to bail-out the S&Ls, I have included some comments from Wikipedia. As you can see a federal bail-out has some precedent.

Personally, although it would be painful, what is the real cost to us of allowing the failure some of the companies and consumers that made poor mortgage realted choices. Right now with a federal bail-out there will be a massive wealth transfer from people who pay their bills to people that made bad decisions. What is the value of that? This reminds me of the saying – “capitalism without failure is like religion without sin”.

The banking industry is proposing to members of the U.S. Congress and the White House that some of the risk of troubled mortgages should be shifted to the federal government, according to a report in the Wall Street Journal on Thursday.

One proposal has been advanced by officials at Credit Suisse Group and would let the U.S. Federal Housing Administration guarantee mortgage refinancings by some delinquent borrowers, said the report.

The Credit Suisse plan would open the way for nearly 600,000 sub prime borrowers, many of whom are delinquent on their mortgages, to refinance into loans backed by the FHA, said the Journal, which cited a Credit Suisse spokeswoman.

The Journal said officials from JPMorgan Chase & Co. are also pulling together their own proposal to expand the number of homeowners who could refinance into FHA-backed loans.

The RTC from Wikipedia:

The Resolution Trust Corporation was a US government-owned asset management company mandated to liquidate assets (primarily real estate-relatedassets, including mortgage loans) that had been assets of S&Ls declared insolvent by the Office Thrift Supervision (OTS) of , as a consequence of the S&L crisis of the 1980s. It also took over the insurance functions of the former Fedral Home Loan Bank Board. It was created by FIRREA, adopted in 1989. In 1995, its duties were transferred to the Savings Association Insurance Fund of the FDIC.

Between 1989 and mid-1995 the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 billion.

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