Wednesday, December 5, 2007

So Many Questions

We are starting to see many questions about this "MLEC for Dummies" scheme being repeated. One answer to always keep in mind: nothing can stop a recoupling of wages and housing prices. Gov't can do little more than create distortions; buying time and increasing severity for instance, or picking winners to the woe of everyone else.

Let's do a thought experiment.
Say you are the investor and you've got 100 borrowers paying a 7% teaser rate. You anticipate the sweet passive income jumping to 10%. Now you aren't stupid. Some of those FBs are toast but how many? 100 FBs paying 7% is the same as 70 people paying 10% right? Normally meaning before Aug 2007 the other 30 would re-fi and pay you off. Even now those 30 are supposedly doing any number of short sales, re-fis and foreclosures. All of of which return some if not all your principal. Not as good as the old days but still good returns and over the time frames you projected. Would you trade that last bad scenario for what the nice people from the government are proposing?

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