Mortgage Bailout 'Plan' Would Stiff Investors

NEW YORK (TheStreet) -- A report on Wednesday that the U.S. Treasury is considering "a plan that could help 1 million or more homeowners avoid foreclosure," leaves some very disturbing questions unanswered.

First and foremost: Why should taxpayers bailout McMansion homeowners and property speculators?

According to Bloomberg, the proposal is "aimed at promoting modifications of delinquent or defaulted home loans, including writedowns of principal" for "mortgages that are bundled into mortgage-backed securities not issued by government agencies."

A spokesperson for the Treasury told TheStreet that the agency couldn't comment on the report, but did confirm that all of the Treasury's current programs aimed at forestalling foreclosures are for mortgage loans that originally conformed to the guidelines of government-sponsored entities, including Fannie Mae (FNMA) and Freddie Mac (FMCC).

According to the report, the plan would address the difficulty in writing down the principal balances of the "nonconforming," privately securitized mortgages because "writedowns can't happen under the covenants governing such securities." Private-label notes represent about 20% "of the $6.8 trillion in mortgage-backed securities outstanding."

Bloomberg quotes an analyst as saying that investors would need "protections in place to make sure the investors get the best price for these loans."

The plan apparently won't cost the Treasury a thing, while obviously forcing investors to take it on the chin. The securitized private-label mortgages didn't conform to Fannie and Freddie guidelines for a variety of reasons.

Some are "jumbo loans," with initial balances exceeding the agencies' limit. Others are loans with small initial down payments or other higher-risk "features" that caused the government-sponsored enterprises to stay away. Finally, many of the private-label securitized mortgage loans were collateralized by investment properties or second homes.

If the Treasury indeed announces this plan, while touting its aim of "helping families," it will be very interesting to see if the families being helped include speculators, wealthy borrowers and those who enjoy a vacation homes in the Hamptons.

Of course, if the government places, as President Obama put it, "some pressure" on banks to facilitate writedowns on the private-label mortgages, the banks -- especially Bank of America (BAC) -- are likely to suffer as well, possibly beyond their current expectations.