when WE buy these crappy mortgages- are we paying just the principal cost, or principal + interest?

[dysfunctional press]

just how hard are we about to be fucked?

[Gman]

1. THe way I understand it is

we will own the principle and collect payments of interest and fees, if they are even collectible. If the mortgagee gets foreclosed, I would assume the US will own the house.

[terip64]

2. So can we let the people stay in their houses and pay us rent, whatever they could afford?

That would be better than letting it sit empty.

[Heather MC]

13. Or I can go to a foreclosed hom and just move in, since I "we" own it now

[slackmaster]

26. That might make sense in some circumstances

For example, there are a lot of vacant houses in Detroit. It doesn't make sense to have both homeless people and vacant homes in the same city.

[EmeraldCityGrl]

4. I wonder what predatory sales strategy they'll apply to sell them back to us. n/t

Maybe they'll become the rent lords of the future.

[SmokingJacket]

5. Surely the govt will resell the mortgages, right? Probly on the cheap.

I can't imagine anyone will be writing out their mortgage checks to the US Gov.

[Raven]

8. Getting some important terms straight...the "mortgagee" is the

lender a/k/a holder of the mortgage. The "mortgagor" is the borrower a/k/a giver of the mortgage. The borrower gives the mortgage (the lien) and a mortgage note (promise to pay)to the bank in return for $. The mortgage (security interest in property) secures the note.

I think the way this will work is that the US will purchase these mortgages either for the principle (face) amount or for something less. The US will have to have a mechanism for servicing (collecting payments) and I suppose they could let the banks who they have bought these mortgages from continue to service them.

[Gman]

18. I stand corrected...

Mortgagor owns the loan, i.e. has the first lien on the property. The mortgagee is the borrower that promises to pay back the loan.

[Raven]

24. Nope. It's the other way around. The mortgagor is the borrower,

the mortgagee is the bank. :-)

[Gman]

29. Thanks!

I'll get it right eventually!

[HamdenRice]

25. Think of the verb "mortgage" as "pledge" and you won't get confused

The borrower pledges or "mortgages" his house to the bank. That's why he is the "mortgagor."

[Gman]

30. Thanks!

I'm unusually dense today!

[Uben]

3. Don't worry, be happy

We'll pay a bit of interest to cover the costs of the executive bonuses for those who got us into this mess, but it'll only be a few billion dollars. You don't need that extra money, and these guys really know how to make that money grow!

[mmonk]

6. The way I understand it.

they will be discounted around 20%. So we will be paying around $0.80 to the dollar.

[mwb970]

7. Um, it's "principal", not "principle".

I just wanted to make sure at least one post in this thread has it spelled correctly!

[mmonk]

9. I understand your principle.

[dysfunctional press]

12. fixed.

fixed back actually- i had had it right, but thought it was wrong...:crazy:

[htuttle]

10. I don't think that most of what we are buying is as tangible as actual mortgages

We already bought any mortgages directly held by Fannie and Freddie when they nationalized last week. But most of their debt, and the debt Paulson will be buying, are things like derivatives of mortgage backed securities, bad credit/default swap contracts, and the loans that these 'banks' took out to purchase all that bad paper.

After we buy these 'securities', most of it will become completely worthless, since nobody in their right minds would buy them back from us at any price -- there's nothing to back them anymore. It'll be like owning a check written on a closed bank account.

[mmonk]

11. Yes. We are essentially providing a taxpayer market for derivatives

and other instruments.

[Wilber_Stool]

23. Thought this might help

From Wiki

A credit default swap (CDS) is a credit derivative contract between two counterparties, whereby the "buyer" or "fixed rate payer" pays periodic payments to the "seller" or "floating rate payer" in exchange for the right to a payoff if there is a default<1> or "credit event" in respect of a third party or "reference entity".

I hope that makes it perfectly clear.

[HamdenRice]

14. You asked an excellent question. Understand the answer and you're 1/2 way to understanding finance

If I understand your question, you're basically asking how does anyone "price" a bond that is no longer worth its face value.

The single most important concept you can understand in order to understand finance in general, is the idea of "discount to present value." It is the concept of how to price a stream of money that will come in the future.

To make it easy, let's assume that there is only one interest rate throughout the market, and it is 5%.

That means that if you put $100 in the bank, at the end of the year, you would get $5. Or a 1 year bond with $100 principal value that you buy will pay you $105 one year from today.

This has many implications.

It means that a promise to pay $105 one year from today is worth exactly $100 today. The discount to present value of $105 paid one year from today is $100.

A two year bond paying 5% with compound interest will pay $110.25 exactly two years from today. That means that a promise to pay $110.25 two years from today is worth exactly $100 today.

But suppose we don't have such round numbers. What is the value of say $200 to be paid one year from today? We just do the calculation in reverse. Instead of multiplying the principal by the interest rate we divide -- by 1 + interest rate (ie, divide by 1.05)

So The promise to pay $200 one year from today is worth $200/(1.05)= $190.48

$200 to be paid one year from today discounted to present value is $190.48

In finance these are virtually identical sums: $190.48 today = $200 one year from today .

So in general, the Treasury will need to look at how the mbs are performing. As I recently wrote http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4044397&mesg_id=4044534">here at post 8 and down, and as few DUers realize, even the defaulted mbs are still mostly performing -- that is still paying. They are just not paying as much as they were contracted to pay.

So to price them, the Treasury will estimate how much they are likely to pay by looking at the underlying mortgages, trying to guess how many more will default and how much money will flow from them to the mbs, take an additional discount for transaction costs. It will look at all the principal and interest that the mbs are likely to pay -- not what they were contracted to pay because they won't do that -- and discount to present value. The estimated flow of money coming in from the mbs will be discounted to present value to get a price.

If done fairly (something that will only happen under an Obama administration and definitely not under McCain who is already talking about "privatization," ie a big giveaway to corporations), then the Treasury will not actually be bailing out anyone, but just making a market -- exchanging one form of "money" for another and getting the exact value for what it pays, and eventually, when the panic is over, turning around and selling it for a tidy profit.

By socializing the banking and mortgage industries and turning a profit, the Treasury through this "bailout" could eventually fund universal health care or the rescue of social security.

[Romulox]

15. This is a BAILOUT, not a market transaction, so all your talk of valuation is silly.

LOL at your lecture about discounting; the market has spoken, and patently disagrees with you about the value of these MBS! :silly:

[HamdenRice]

16. Thanks for your "well reasoned" response nt

[Romulox]

19. So that lecture has no bearing on the present reality, eh? That's what I thought. :P nt

[mmonk]

17. You really think the government is trying to turn a profit

so it can finance healthcare and Social Security? The government doesn't have to turn a profit to decide what to fund and not to fund. It's not a business. It will be looking at the best way to recoup cost. This is just my opinion.

[HamdenRice]

20. I don't think that's what Paulson's trying to do

But it may be what an Obama administration will do. Generally democratic socialist governments have indeed tried to run nationalized industries to turn a profit.

Clinton's bailout of Mexico during the Mexican peso crisis turned a tidy profit.

Because the government can calculate present value, give take it or leave it offers to desperate banks, and help fix the underlying mortgage crisis, they are in an excellent position to turn a profit in the end. And the profit on $1 trillion+ could be enormous.

[Romulox]

22. He's proselytizing his religion; his talk of valuation of an unsalable asset

should clue you in that he's not operating from a position of logic.

[dysfunctional press]

21. socialism it is then- if we bail it out, we own it.

wouldn't it be nice to have wall st. working for us for a change?

[Robbien]

27. We are not buying the mortgages, we are buying the crappy investments built on top of mortgages

We are buying the toxic investment instruments, not the mortgages. Banks will hold on to the mortgages because they are worth something. The investment vehicles they've been building based on mortgages are worth nothing and these are what they want to sell to the Fed.

[HamdenRice]

28. They are only "crappy" at face value

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4044397&mesg_id=4044534