A potential solution.
Though pushed into it by their settlements with state attorneys general, Bank of America has come up with a solution to the mortgage melt-down that should be emulated. Though this seems on its face to be a radical response, a drill-down analysis shows it to be a shrewd move.
What it really means.
The loans had already gone through a “mark to market” revaluation. By recasting the loan terms, nonperforming mortgages can become performing again, thus increasing their value. If all holders of mortgages did the same, liquidity would return.
According to today’s Wall Street Journal, “The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.” By acknowledging the true underlying values securing mortgages, lenders could potentially preclude another onslaught of foreclosures. A healthy, realistic market will return value to the mortgages and mortgage-backed bonds, which will reverse the liquidity crisis.
Copyright ©2008 Dow Jones & Company, Inc.
If all mortgage holders followed BofA’s move, the Treasury wouldn't have to buy toxic loans, as they wouldn’t exist. This would be a much better solution than the bailout, as it is more orderly and eliminates taxpayers’ risk.
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