BofA: $739 billion in mortgages at risk in next 5 years

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In a confidential proposal to the government Bank of America warned that nearly $800 billion in mortgages (of all types, not just subprime) are at ?moderate to high risk? of defaulting due to detoriating housing conditions over the next 5 years. The Bank of America proposal calls for the creation of the Federal Homeowner Preservation Corporation to lead homeowners and banks out of the housing bust.

If anyone thought that the bail out was in full swing; a move like this would kick it truly in to full bail out mode. The proposal, and several others, are getting a lot of attention by the Bush administration and Congress as home prices, late payments and defaults continue to pile up at an alarming rate.

From the New York Times article covering the increasing prospects of a federal housing market bail out:

To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.

?We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,? the financial institution noted.

In practice, taxpayers would almost certainly view such a move as a bailout. If lawmakers and the Bush administration agreed to this step, it could be on a scale similar to the government?s $200 billion bailout of the savings and loan industry in the 1990s. The arguments against a bailout are powerful. It would mostly benefit banks and Wall Street firms that earned huge fees by packaging trillions of dollars in risky mortgages, often without documenting the incomes of borrowers and often turning a blind eye to clear fraud by borrowers or mortgage brokers.

As we have said many times on this blog that a bail out is unacceptable and does nothing to prevent a repeat of the excesses and gluttony of the banks and Wall Street from occurring again. It’s called moral hazard and we’ll pay for it in the future as people and businesses continue to bet on the government coming to the rescue any time irrational and risky bets are lost.

The plan also uses federal tax money to bail out those that made the most money during the run-up at the expense of those that didn’t benefit at all. Using money of people who didn’t participate in the run up is inexcusable. Imagine trying to explain to someone who kept renting instead of taking a stated-income, teaser-rate loan because they believed that they should save, put 20% down and be able to afford their loan that they suddenly are responsible for their neighbor’s greed and irresponsibility? Insanity defined.

More from the NY Times:

Supporters contend that a government rescue could be the fastest and cleanest way to force banks and investors to book their losses from bad mortgages ? a painful but essential first step toward stabilizing the housing market.

The government would buy the mortgages at their true current value, perhaps through an auction, at what would probably be a big discount from the original loan amount. The mortgage lenders, or the investors who bought mortgage-backed securities, would be free of the bad loans but would still have to book their losses.

If the government took control of the bad mortgages, supporters of a rescue contend, it could restructure the loans on terms that borrowers could meet, keep most of them from losing their homes and avoid an even more catastrophic plunge in housing prices.

Will a federal housing market and mortgage bail out work?

The answer seems to be “no.” We are clearly facing a recession, home prices continue to fall, mortgages continue to default and inflation is creeping back in to the picture in the face of the patch work of federal and state programs being thrown at the problem. And guess what? It’s a good thing! The NY Times article concludes:

Right or wrong, the arguments for rescuing homeowners are likely to be blurred with arguments for rescuing home prices. At that point, industry executives are likely to argue that what is good for Bank of America is good for the rest of America.

The rescue isn’t always in the direction you think.

Home prices do need rescuing! And guess which way is the rescue? Down! To affordable levels where demand can be created and sustained by folks with real income buying real houses. Rescuing is not keep artificially inflated prices at a premium where people have to spend every last dime of imaginary income to find a place to live.

Let the rescue happen. Let prices come down to where they are supported by demand driven by common-sense underwriting guidelines and we’ll see a return to growth and prosperity in the economy that is healthy and sustainable.

What do you think?