One huge problem that exists with today's market is valuation - and it would be very difficult to place real market value on the mortgage assets of the tranche (in terms of 'mark to market').
My .02
The point of my plan, if the government rules allowed it, is that it wouldn't be necessary to make such valuations on the tranche as a whole. Just allocate the mortgages by lottery. Some people might be lucky and get good mortgages that were still paying off. Others might get properties that were bought at peak prices and then trashed so badly that they're worth less than vacant lots. That would be the luck of the draw. The expected initial value for each investor who opted for a random consolidation would be precisely equal to the average value of mortgages in the tranche; the fact that CDS would be replaced by a single mortgage would then give the holder the ability to do a proper evaluation of his property and figure out what it's worth and whether it would be useful to renegotiate the mortgage.
Thanks for responding. You have an amazing ability to communicate things and break them down and simplify them. After your thoughts last night I educated myself a little bit more today and found this link. It also explains why this isn’t just about the housing market:
“The Real Reason For The Global Financial Crisis...The Story No One’s Talking About.”
http://www.marketoracle.co.uk/Article6335.html