A bit of followup from my previous post on the possibility of subprime bailout.
Several states are looking into bailout hybrid arrangements involving private sector refinancing of subprime mortgages in – or due to – default, backed by bond issues. The Maryland program provides a state-brokered refinancing via commercial lenders, targeted to lower income borrowers, where…
[a]fter the approved private lender puts together the new loan, it bundles it with others and sells them to the agency, which uses cash from a bond issue to buy the bundled loans.
The goal is that state coffers would not be used - the state hopes to pay off those bonds with the interest it collects from borrowers.
Other states are proceeding along similar lines. I find this expectation of the states covering their nut via interest paid a flawed concept, since the borrowers were already considered poor credit risks. With the state covering the bond if the covered borrowers default then it is still taxpayer money, a situation that a majority would like to avoid. The lenders who underwrote the original risky mortgages should bear a big part of the cost, since it was their speculation on subprime borrowers that failed.
Federally, Freddie Mac will be implementing its own program to facilitate refinancing for subprime borrowers. Some smart & responsible features of the plan are the tightening of borrower’s documentation requirements and the requirement of lenders to qualify at a fully-amortized rate, restricting the influx of further risky debt. The odd part is that Freddie Mac is one of the repackagers/issuers of mortgage-backed securities, which in my estimation is part of the subprime problem.
Helping borrowers avoid default can be a very good thing, especially with some fiscal discipline learned along the way. The political cost should states be forced to cover defaulted refinance… that’s a good question. Time will tell.