> When you say "mortgage portfolios," are you talking about
> actual mortgage loans or their collections of MBS?
The mortgages themselves.
> If the former (buying mortgages), the ones presently held
> by banks seem to be only a small minority of the problem mortgage
> loans outstanding.
I think you're skipping ahead a step. The first step, putting all[*] the mortgages under the control of the Super-GSE, doesn't have much of an impact on the Bank Crisis at all. It's the 2nd step -- refinancing them, and thus closing out the pools -- that has some impact. The pools will make or lose money, but that's not my concern here. And: the impact won't be that big, but it will remove the collateral damage that's being done presently to homeowners (and probably fueling the recession, but this is secondary).
Which is what Obama says he wants to do.
(Have you seen the sketch of His Plan? I've never seen a more complicated way of *maybe* helping *some* people, over *some* amount of time).
[*] Remember that when I say "all" I mean "all owner-occupied residential" ... I'm using shorthand, but I'm specifically talking about "regular folks" and not speculators or commercial real estate.
> (The majority are owned by investors in securitized pools and wouldn't
> be touched by this.)
I see your problem: when you "buy" an MBS, you aren't actually buying the mortgages. An MBS is a synthetic instrument, afterall. It's like buying shares in a mutual fund. The mortgages get put into a trust, and the trustee arranges to receive the cash flows on the actual mortgages from the loan servicers -- which are mostly banks anyway, but also include pure-play servicers. The trustee refactors the incoming payments and payoffs according to the formula for the MBS for payment to the MBS shareholders. Because MBSs are "secured" there is this idea that in some sense the shareholders "own" the mortgages, but really they just have a claim on the cash flows in the trust. The mortgages in the pool are actually owned by the pool aggregator, though the cash flows have been contracted out to the MBS shareholders, so they don't actually appear on the originator's balance sheet.
The trusts already have to deal with things like pre-payments (when people sell their house or refinance or, more rarely, when they default), which they will -- in the 2nd step -- get a ton of. Once all the loans are either written off or payed back, the trust dissolves.
BTW, there will be a negative outcome to this for the MBS holders: these trusts will dissolve and they will get most of their money back at a time when interest rates are low. Hopefully they'll find something to do with their money :-) Further, any MBS that has CDSs attached to them will also expire. C'est la vie.
> If the latter (buying MBS) ...
No, My Plan leaves the MBS market largely intact, except that the majority of them will be issued by the Super-GSE, which will continue to finance their mortgage purchases in the traditional way: by packaging them into MBSs and selling them at auction. The big change is that it's no longer easy to issue a new MBS if you're not the Super-GSE (because non-GSE-sponsored mortgages will be rare), so the market for them will be small, illiquid, and probably not worth it for anyone.
Mortgages will become boring again.
> I'm not sure what you mean by getting them to "exit the home
> mortgage market" ...
No more proprietary originations except for commercial and non-owner-occupied properties (which will be 'sophisticated investor'-only). "The Residential Mortgage Business" will become a pure paperwork -- and thus low margin and unlikely to be interesting to banks -- business. The Super-GSE will set the standards, as they have been doing, and there will be a single point of regulation. I expect that the "job" called "Mortgage Broker" will cease to exist: it would be like "bus pass seller" ...
What happened to this market is that because the GSEs controlled about half of it, and their standards were too high to generate the kinds of volume that were required to keep the Golden Goose Laying, a whole industry popped up to fill the void: Countrywide, IndyMac, etc. with securitization being handled by Lehman, et al. Out the window went standards and the risk was concentrated and ultimately levered.
> So does this mean the government is offering to buy their portfolios
> at actual current market values?
Not market value, but "payoff" value: in effect one-half of a refinance. The market value, for some, would be quite a bit lower -- but irrelevant. My point in all of this is that the GSEs are already the biggest player in residential mortgages; it's the part of the market that they *don't* control that went nuts, so that's the part that has to be shut down. There was this idea that the industry would somehow "compete" with the GSEs, but in fact the privelege of competing with the government has been abused. Since all the traditional banks went along with it, they are all culpable. It's kind of like the Black Sox; no one cares the Buck Weaver batted .324 in the Series.
> I don't understand at all the inducement of banks to sell.
It's a tradeoff: they stop getting interest on the loans they own and fees on those that they service; but they also don't have default risk for the ones they do own. And I guess there will be stockholder pressure to take the deal, since all their competitors will be taking it. It's what they call a no-brainer :-)
I suppose you could throw in an 'inducement' like: for any mortgages you keep, you have to confirm the status of the mortgagee as a 'sophisticated investor' ... that oughta do it :-)
---
Note: My Plan is not the big plan for how to fix the world economy; it's just a plan for how to address one spectacular fallout of the current situation -- individual homeowners' defaults and foreclosures -- and how to take a broken market out of the equation. The banks can live or die, but they've screwed the pooch on the home mortgage market and should be punished for it.
A big problem in the current situation is that instead of spreading risk, these shenanigans have had the effect of concentrating it; putting mortgages all back under one umbrella will remove the ability to concentrate the risk and make it easier to regulate. Yes, it means that the govt. will be on the hook for more default risk (note they are already on the hook for some, but due to better underwriting standards of the GSEs and things like PMI, that part of the book is much healthier than the private part), but a) it will be less concentrated than the current risk and b) the refinancing should stabilize the market and cut down on defaults.
The major structural change here is that the US government would have a big call option on the housing market returning to historical levels.
/jordan