The "Patrick -Taylor" Mortgage Fix Worth A Look

While all those in Washington- The Fed, Congress, Treasury, and White House have been all but absent in putting forth a plan that would actually do something about the core of the credit crisis- mortgages, there are plenty of plans that have been floated that make sense. One of them is the "Patrick-Taylor" plan which was detailed in the Saturday edition of the NY Times. The plan calls for a refinancing of all the loans that are entangled in the securitized mortgage web, a total of $1.1 Trillion. This move would re-inflate the value of all those CDOs and the like which have tanked Wall Street. Such re-inflation would be a bailout in itself to Wall Street and would staunch the flow of foreclosures. Ok, so it's a little complicated, but it seems to make sense. Before I try to explain the whole scheme, perhaps you should just read the article:
Fair Game: A Rescue Plan Without Taxpayer Money (NY Times)


  1. I fail to see how this would work. I understand the line of thinking, but it's taking $X in loans that are off balance sheet, and then replacing them with $Y in new loans, which would now be on balance sheet ... part of the problem was the number of times these banks sold off loans to make new loans ... and locking in gain-on-sale profit upfront... how could one refi something with so much leverage ... firstly the bank B/S isn't large enough to support that plan, secondly it would require higher cap requirements

    I support the current plan, even with its flaws. Get liquidity into the system - no need to attack the center.

    I mean... god forbid someone forgets to steal... you know, whatever... give banks some money and let them run with it ... the gov't is gonna print money until they’re blue in the face to fix this and it wont matter because all the ppl that had bad things to say about the dollar are scooping it up bc, oh we all forgot, it's 12 times the size of europe... and all the money in asia doesn't mean the same thing... they just dont have the fin infrastructure... i.e., things will recover... i mean how long does a loan take to close... months! ... so everyone needs to chill out and let this money do its thing.. ... that's all.

    my recommendation is not to get caught up in this "crisis" talk... it's time to put money to work and let the ppl doing the talking continue to make it an opportunistic time to buy a lot of blue-chip equities that have market caps less than the money in their cash register. you'll kick yourself in a year if you have too much on the side lines right now ... don't have to get the bottom to get a good deal in life... and now is a good deal for a monkey with a dart... capital preservation time is over.... time to work.

    Just my afternoon thoughts for what they’re worth.

  2. oh yea, thirdly... how does this guy expect banks to lend and, god i hate this phrase, unfreeze credit, if they take the loans on-balance sheet and also have to absorb the losses. okay - they f***ed up - whatever... it's over. let's move on and let them do what they eed to do with their money and more people can have jobs writing dumb opinion stories about moral hazard

  3. Yep, it's a heck of a complex problem. However, this is one of the few ideas that seems to really deal with the problem of getting the good mortgages out of the securitzed market before they go bad.
    Just an idea.
    I share some of your optimism, however, I'm not happy with the bailout overall. The biggest problem we have here is that banks are not lending. Let's face it, they'll keep boycotting until they know that they won't be rewarded in the billions for doing so.
    Our biggest problem (housing wise) right now is that the spreads between the 10 year T and the 30 fix mortgage are through the roof. By historical standards, a 30 year fixed rate should be around 5%. If that was the case, I believe housing would be turning around right now.

  4. by historical standards, mortgages aren't high, to my thinking - they ARE in recent history, when securitizing loans drove down the price. jumbos are crazy, sure...the spread between the 10T and mtge bonds are, sure - almost 185bps right now... okay to that. they should be lower relative to where they are okay

    but I'm not a fan of artificially subsidizing 4% mortgage rates or buying up CDO assets to attack what ppl call the problem... smart ppl are trading those instruments, as they're very safe CMBS and CDO paper trading at 12% ylds. and some tranches that are rubbish backed by bingo hall cashflows. fixing mortgage prices with low rates smells like the S&L problem, in a round-about way... I say give them the cash... let them pad themselves a bit... let them pick and choose their opportunities like you'd do if you were playing the market... and the same dynamic that drove down mortgage costs over the last decade will come back because money will be put to use in good ways for the bank and a lot of that will be good use for the fin system in general, I think...

    the root of this crisis--in my thoery--has little to do with the loans and the housing and the bonds and the lending... it's the sidebets, which are functioning fine... they're just giants relative to any of this. the default swaps that are settling were supposed to be free money... 10bps p.a. the size of a deault swap in, say, a synthetic CDO is upwards of 90% of the structure... in other words... MASSSIVE. In some cases, you have people saying f*** you, I'm not paying up, and that's screwing both parties. Lehman just defaulted on a currency swap on a Euro RMBS deal - wherre they took the P&I from the loans, and just didn't pay the interest on the Bonds denominated in dollars. so you've AAA classes not getting interest, and BBB classes rrec'v money. the system just needs money and time to unwind... I don't think--on a macro-level, at least--that we need to attack mortgages.

    don't get me wrong... there are real live people with real live problems... not trying to be a machine in my thinking... but i don't think the ecoomy is as bad as the doom and gloom we're eating

    okay back to work before i get fired and thus put my foot in my mouth anout the state of all things

  5. and i suppose everyone's got an opinion on big things like this... at the end of the day i've never managed 700 billion - so I won't pretend to claim i'd do a good job... i'd like to read more on the comment side, here...

    oh - and thanks for the blog - i've been a reader for the better part of a year

  6. Ryan-
    Let me guess- you are in finance.
    Sounds like you have a pretty solid understanding of the problem. I can appreciate your free market approach. We've been oversold on the whole "we are in the greatest economic downturn in a lifetime" thing. The media, in many ways, has made this an almost self-fulfilling prophecy. Looking back, simply bailing Lehman and preferred holders of fannie and Freddie would have saved us billions. It was really the fact that preferred holders getting screwed froze up the system, but hindsight is 20/20.
    If we can somehow get the spreads down, I think things will turn around. In fact, the national market (housing) was near bottom before everything else hit the fan. Lower rates would go a long way, but how do we get there? The Trillion dollar question!

    Thanks for being an avid reader. I have recently turned the spam settings down to encourage more comments. While I may have to take time to delete vacation and mortgage offers, it should be worth it.

  7. yes - finance - and, lucky enough--despite my opptomistic outlook, I've a job (still) modeling mortgage backed bonds (US and Europe). :)

  8. interesting:

    By Alison Vekshin and Alison Fitzgerald
    Nov. 17 (Bloomberg) -- The Bush administration told
    congressional aides it won't ask lawmakers to release $350
    billion remaining as part of the $700 billion U.S. financial-
    rescue package, people familiar with the matter said.
    The administration of President George W. Bush ends in less
    than 10 weeks, and a delay in submitting a request to lawmakers
    would leave it to President-elect Barack Obama to tap remaining
    funds in the bailout fund.
    ``I think it is the right thing to do,'' Senator Richard
    Shelby, top Republican on the Senate Banking Committee, said
    today in a Bloomberg Television interview. ``I think we need to
    debate this. I think the American people need to know where the
    first $350 billion went, who benefited from it.''

  9. Yep, I caught that earlier today on drudge. Shelby may be onto something!

  10. speaking of the 700B
    and why it's a good time to buy....

    take Citi - they're getting rocked this morning... and ppl are saying this is bad news about them buying 17.4billion in mortgages...

    come on world. wake up.

    * the gov't says we aren't using the funds to buy mortgages
    * the govt cuts large checks and doesnt say to where and for how much
    * citi buys the shittiest assets out there...

    gee i wonder what happened.
    the govt gave them money, put a gun to their head and said we aren't looking like fools for buying mortgages.. you do it... but here is the money. it went in the front door, out the back door, and citi just got 17.4billion of mortgages at no cost to them.... now they'll servie them, make money, and sell them off in a few months and make more money.

    this is the economy bottoming out buy buy buy
    don't let the news fool you... this is all good stuff, I think.


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