Home Loan Wholesale

Paulson yesterday asked Congress for unfettered authority to buy devalued mortgage-related securities from investment firms in an effort to keep the financial system from coming to a standstill. The proposal would prevent courts from reviewing the Treasury’s actions while raising the nation’s debt ceiling.

The U.S. Treasury late yesterday modified its proposal to allow for purchases from institutions outside of the U.S., a step Paulson today said was needed to mute the impact of the credit crisis in the U.S.

Bush said Saturday the White House is ready to work with Congress to quickly enact legislation to allow the government to purchase hundreds of billions of dollars worth of bad debt linked to the collapse of the housing market. This marks the biggest government intervention since the Great Depression.

Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, said that what Congress was being asked to approve was the “mother of all bailouts” which Shelby said would end up costing more like $1 trillion rather than $700 billion when the costs of the government taking over mortgage giants Fannie Mae and Freddie Mac and insurance giant American International Group Inc. were added. The credit markets are still very fragile right now and frozen,” Paulson said in an interview on NBC’s Meet the Press. “We need to deal with this and deal with it quickly.”

“I don’t want the American taxpayer to get this bad debt and then the guy (whose company once held the bad loans) gets millions of dollars on his way out the door,” said House Financial Services Chairman Barney Frank, D-Mass.  “This is not a position where I like to see the taxpayer, but it is far better than the alternative,” Paulson said on NBC’s “Meet the Press.”

 Two weeks ago, the government seized control of the nation’s two largest mortgage companies, Fannie Mae and Freddie Mac, and then last week, it took control of the country’s largest insurance company, American International Group Inc.  The legislation Congress passed this summer that gave the authority to rescue Fannie and Freddie boosted the limit on the national debt by $800 billion to $10.6 trillion. The legislation the administration is now seeking to authorize the financial system bailout, according to a draft obtained by The Associated Press, would boost that debt limit to $11.3 trillion, up another $700 billion.

The economists think the bailout is a good idea. “This could go a long way toward solving these problems,” said Mark Zandi, chief economist at Moody’s Economy.com, who has written a book on the mortgage meltdown.  No one knows for sure how much it’s going to end up costing, but Zandi said if the experience with cleaning up all the assets left over from the savings and loan mess is any guide, it should be less than the $700 billion that the administration is seeking.  Homeowners are looking for help with Foreclosure Prevention. “There is a risk that there will be bank failures to come,” said Vincent R. Reinhart, former director of the Federal Reserve’s monetary affairs division.

Another risk is that if the auctions set too low a price for mortgage-related assets, other institutions with bad debt may be forced to take the distressed valuation onto their books under mark-to-market accounting rules, Reinhart said. Mark-to-market rules involve adjusting the price of an asset to reflect its current market value. “If the auctions don’t go well, it will drag down everybody’s balance sheet who marks to market,” Reinhart said.  Right now, it looks like the ones benefiting are the investment banks that bought into these bad home loans. It appears that the taxpayers are left holding the bag on bad decisions made by greedy investment banks. But, it is being called a “necessary evil” to keep the economy from collapsing. Once the dust settles, it will be a matter of time to see exactly who benefits. Right now, credit is still frozen, making it very hard for anyone who wants to buy or refinance a home with a conventional loan. FHA, VA and other government-backed loans are still by far the best option for mortgage loans.