Buying bad home loans would beat bailout -JPMorgan
By Al Yoon
NEW YORK, Sept 25 (Reuters) - Buying $1 trillion of delinquent home loans at steep discounts would be a more direct way to break home price declines and rising foreclosures than the U.S. Treasury's proposal to soak up troubled securities, JPMorgan Chase & Co. analysts said.
Government purchases of bad loans could buoy home prices and unfreeze capital markets at the lowest possible cost to taxpayers, the analysts, led by Dale Westhoff, wrote in a research note published on Wednesday.
Illiquid mortgage securities are currently priced to the worst-case scenarios of home price declines and defaults because "nothing has occurred to suggest an end to the self-perpetuating cycle," the analysts wrote.
The key for a self-reinforcing program "is to implement it at the loan level with a single objective: to establish a floor on collateral pricing," they added.
An entity similar to the Resolution Trust Corp. could buy loans at 60 percent of their unpaid principal balance, giving itself the ability to modify mortgages to affordable terms. Capital markets could restructure existing mortgage bonds to create securities, backed by the 60 percent balance, that are government-guaranteed for a period, they said.
The "super senior" securities would sell at yields only slightly higher than "agency" mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, they said.
Addressing home prices is critical amid expectations for an additional 5.5 million foreclosures over the next five years, on top of about 2 million already in or through the process, they said. Outside of loans in U.S. mortgage programs, the government would buy some $1.05 trillion in loans for a price of $630 billion over five years, they said.
Total losses on liquidated mortgages average less than 40 percent, so the program should be self-funding, they said.
The plan should be pursued independently of decisions to participate in the purchase or sale of securities backed by the loans, they said. Lawmakers on Thursday were close to agreement on a massive $700 billion plan to buy illiquid mortgage assets in a bid to stabilize financial markets.
"The new program will put the government at the throttle of foreclosure supply, ending the destructive distressed selling that has been wreaking havoc" on home prices," they said. (Editing by Leslie Adler)
