Thursday, September 11, 2008

SRF and the Mortgage Mess

In the last post I noted that Shared Risk Financing eliminates the need for re-insurance. Therefore, this reduces the need for re-insurance schemes like Freddie Mac and Fannie Mae.

The Mortgage Mess happened because housing prices did not increase at the rate anticipated by borrowers. A large number of people owe more than their home is worth and are walking away from mortgages. There is a liquidity crises because banks have no way to know what their mortgage portfolio is worth.

Switching troubled loans from the mortgage to a shared risk contract would give the parties involved a clear idea of what they owned, and would restore liquidity.

A borrower would move from the situation where they owe a fixed amount on a house, for which they don't know the value. The lender would move from a situation where they have a fixed loan but don't know if the borrow will ever pay them back to actually owning a share of property which can be valued and traded.

The initial act of valuing and trading the SRF's would created a mini financial boon as the market re-aligns. The Feds would probably have to pour some cash into the pot to help home owners seriously underwater. The SRFs put the primary parties into a situation where they have better knowledge of their assets.


Scott Hinrichs said...

Interesting proposal. I suspect that brokerages and bundlers would quickly pop up to market mortgage investments to institutional investors, like mutual funds.

y-intercept said...

At today's inflated prices, a bundle with shares of 100 homes would be larger than many companies trading on the NASDAQ. As land rarely falls to zero, the investment would be more secure than gambling on stock. Once the accounting practices are set, the accounting would be easier than the accounting of most companies.