I blogged recently about a thought about stock purchase as a means to bail out the weakening sub-prime brokers. Well it turns out that similar thinking was going on in Washington, and it resulted in this plan, being proposed by Chris Codd.
“Senator Chris Dodd, the committee chair, said he is working to create a Home Ownership Preservation Corporation, which would purchase mortgage securities that are backed by at-risk, subprime loans from lenders and investors.
This corporation would give these lenders and investors a better price for the securities than they would get if the properties backing them were put through foreclosure.
Additionally the loans on these properties would be restructured so that borrowers could afford the new payments and remain in their homes.”
Essentially this buys the bad debt, restructures it and re-prices it, then sells it back to the industry. Essentially a cash infusion, to the places that needs it, the financial companies laden with bad debt. The good news is that it does what is needed from a cash flow perspective. The bad news, which may not be bad news but just wasn’t clear to me, is what oversight and policy changes will accompany this move. I firmly believe that if we bail out corporations who made bad debts with a bailout, and don’t bother to provide legal oversight, or ensure that the cash we put in comes back out at some point, then we just paid off the people who made bad decisions. Bad Bet on Credit? No worries we’ll fix it on the taxpayer dime.
Now before I come off sounding all cynical (or is already too late 🙂 ) I think this step is needed, and I do give credit to the folks in Washington to have enough sense to at least hire real economists. Dodd has some experience here and I think they’ll have some oversight in the deal or to follow.