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One of the major problems with today's mortgage market is that there are many mortgages which should be renegotiated, but because of the way mortgage-backed securities are divided up, such renegotiation is essentially impossible.
Presently, many mortgages are bundled into groups called tranches, and
then those groups are subdivided into shares which are sold to investors. No single investor has enough stake in any particular mortgage to make it worthwhile to take the time and effort to renegotiate it, nor is it possible to assemble anything resembling a quorum of shareholders to allow such renegotiation to take place.
What I would suggest would be a rule to allow holders of mortgage-backed securities to request that their shares be converted into mortgages; on a periodic basis, a lottery would be held for each tranche where one or more such requests were outstanding. Mortgages would be selected at random from the tranche and assigned to individuals.
For example, if a tranche has 100 mortgages and is divided 100 ways, and 25 people want mortgages, then 25 mortgages would be selected at random from the tranche and randomly allocated to the 25 people seeking to consolidate. The other 75 shares would each hold 1/75 of the other 75 mortgages.
Some people would get better-than-average mortgages, while others would get worse-than-average mortgages. On the other hand, people whose holdings were consolidated would be able to determine what they were actually worth and determine what should be done with their properties. Someone who was willing to put some effort into assessing and protecting the value of their property could expect on average to come out well ahead of where they'd be with small shares of many largely-unsupervised mortgages.
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Annotation:
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You are proposing yet another exotic mortgage derivative. |
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No, I am suggesting a means of dealing with the existing mess of derivatives that are out there. |
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As things are now, there's no practical way for many holders of mortgage-backed securities, nor any prospective purchasers, to find out even the most basic things about their investment, e.g. are the mortgaged properties occupied, are they being cared for or vandalized, etc. If the government were to provide that issuers of mortgage-backed securities may reallocate by lottery the assets within a tranche, that would allow the securities to be converted into a form (loose mortgages) that could be priced much more effectively. |
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How can they possibly be repackaged without the government buying them? |
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Parents should not outlive their children. |
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Maybe it is not so bad that I have a better quality of life than they will. |
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Very few tranches of MBS's are safe. Grabbing a mortgage at random from a tranche would give someone an asset that was more volatile than the tranche as a whole, but which had a higher expected average value. As for the other people in the tranche, pulling half the loans from the tranche, drawing at random, would leave the shareholders with a potentially more volatile mix, but the effects would be minor compared with all the other effects of toxic paper. |
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Existing mortgage contract terms are what they are. If lenders don't like them, too bad. |
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The old rules requiring 20% down payment worked well for promoting stability. Housing prices were based on realistic valuations as living quarters, and thus speculative pressures on the market would seldom produce a bubble of more than 20%. The only time a home's equity would go negative would be if something happened to fundamentally devalue the property (e.g. a disaster made it impossible to inhabit or rebuild). |
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The only bad thing about no-recourse loans, is their severe financial impact :-). |
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My society lets you rot in sequestration for the most piddling amount. To me it is bewildering that you can walk away from a liability and its corresponding asset. Bizaare. Almost impying that the asset was worth more than your compounded interest, but the person who now owns it just "didn't waqnt to buy it". There is certainly no future in that model. I suppose in a low interest, high demand cycle, it is the truth, but that is just a cycle. Someone, anyone, should have seen this coming... |
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On the idea. We have seen several of these deffered risk schemes here (Fedbond), and they all, bar one, have gone tits up. Although, lottery styles might mitigate this to some extent. With the lone success under investigation as we speak. Arbitration of risk works on the law of large numbers. Unfortunately the property (residential and commercial split of course) market tends to move as one, and therefore precludes its use as an underlying risk (it is not statistical isolated). |
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To my mind, instead of taking out one mortgage for the entire property value, loans (80% LTV) should be spread accross several risk takers, each removed no more than the deposit from the debt. This ensures the eventual owner is the "majority stake-holder" for most of the term. The further removed you are from the risk, the less percentage interest you are paid, with the aggregated interest being at the lending rate. This is sort of a capital adequacy requirement, not legislated, but driven by market making it flexible, within limits. Those far removed from the risk are not getting enough interest to borrow the money from a central bank, and need direct capital to underwrite, and those close to the risk are recieving more than adequate protection from the repo-lending difference. |
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This is, in essence, what was happening. It is just more transparent to the end user. |
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//That's what got the US banking system currently so deeply mired in the shit. Time for a review, I would suggest.// |
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What got the US banking system into its present mess was the huge amount of FRAUD committed by loan originators who gave loans to people who were obviously never going to pay them back, bundled them up into "mortgage-backed securities", and then sold them off to unsuspecting investors. |
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There's nothing wrong with a no-recourse loan in a stable market to an honest borrower with 20% down. The 20% down *IS* adequate recourse in 99.9% of defaults, and in cases where it isn't, it's better to have the lender accept the risk than to have a third party "insure" it. |
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Really, the system the U.S. had from the late 1930's until recently was just fine. It was the injection of fraudulent paper that created the problems. |
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