Mortgage Bailout 'Plan' Would Stiff Investors - TheStreet

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) - Get Report

-- are likely to suffer as well, possibly beyond their current expectations.

As of June 30, Bank of America estimated that the "range of possible loss could be up to $5 billion," on private-label securitized mortgage repurchases, beyond the company's $8.5 billion settlement of mortgage putback claims on residential loans originated by Countrywide.

JPMorgan Chase

(JPM) - Get Report

reported $1.8 billion in repurchase demands from "GSEs and other" as of June 30, with the government-sponsored enterprises making up the majority. The company faced another $1.1 billion in claims by bond insurers.

Wells Fargo

(WFC) - Get Report

said in its second-quarter earnings release that a proposed $125 million settlement of private-label mortgage repurchase claims should resolve the claims for "most purchasers" of the private-label mortgages.

RELATED STORIES:

Foreclosures Are the Solution, Not the Problem >>

Mortgages Banks Are Happy to Modify >>

--

Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.