This is a good analysis for outstanding mortgage debt.
One reason the proposed bailout is so much larger than calculated here is because only a percentage of the toxic debt they want us to buy is mortgages.
This isn’t about covering bad mortgages - it is about restoring the lender’s original investment in all kinds of bad debt. Paulson wants to give the lenders liquidity (cash) so they can get back to buying/selling debt. Right now their working capital is tied up in bad debts that will never return their investment, let alone give them a profit.
A very big percentage of the trash debt they want us to buy is bad consumer debt - uncollectible credit card charges, unpaid student loans, car loans, signature loans, etc. Very little of this debt is backed by any kind of collateral. Maybe some of the car loans but usually they only return 20% - 30% on the dollar, when and if you can locate and reposess the vehicle.
And we are not going to get a package of mortgages with only a potential 4% or 5% bad home loans.
The packages we get will have some mortgages mixed in with other debt but almost all will be bad - already foreclosed or far in arrears and they will mostly be undersecured.
Remember - part of the original problem is that lenders assigned unearned and false high credit ratings to unquialified lenders.
So some mortgages were made to lenders with poor credit but the mortgage contract shows they have a good or fairly high credit rating. Another reason why no one really knows what is in these packages.
Here is the way it works. A lender takes a big chunk of low rated and bad debt - say $95 million - and adds just enough higher rated debt, maybe $5 million in up to date mortgages, to bump the whole package rating up enough so they can raise the sell price.
The next buyer buys five packages like that and adjusts the ratio of good debt and bad debt to justify an even higher selling price, and so on.
It ends up that no one really knows what they have bought or what it is really worth. The want the cash flow and a chance to resell at a profit.
But when borrowers stop making their monthly payments the whole house of cards collapses.
CORRECTION TO POST 47:
Remember - part of the original problem is that lenders assigned unearned and false high credit ratings to unquialified lenders.
Should read
Remember - part of the original problem is that lenders assigned unearned and false high credit ratings to unqualified BORROWERS.
ping 47
flipping houses on grandiose scale