Quote Originally Posted by 2_Thumbs_Up
I knew this was more or less the case for regular mortgage loans. Do you know if this is also the case for the subprime loans? I have never heard it when the subprime loans are mentioned but I have no definite source.
Yeah, the underlying securitization of a Alt-A or other subprime mortgage is no different than any other kind. The only difference is the creditworthiness (or ability to document said creditworthiness...) of the borrowerer. All other rules apply.

Of course, you can make the case that people with Alt-As or worse don't have much in the way of assets, and you can't get blood from a turnip. However, I believe there's a sh!tload of poorly informed buyers (assuming if they suck out loud in their finances in general, they're prolly not doing much reading into the real obligations they're assuming...) who are literally going to sh!t a brick when they get the tax notice and/or the summons based on their deficiency judgment that they thought they'd just walked away from...

Also, this is going to play across the board for all investor/speculators. There is no deficiency protection for anything that is not a purchaser's single primary residence. You're not allowed to just flip the bank the bird and walk away from a speculative securitized bet. If you do, I sure hope you did a great job wrapping your ass in C-Corp or LLC status or the bank (or their assuming creditors after they're rolled into bankruptcy...) will come knocking. And if they don't find you, they'll just write off the loan and let the IRS chase your ass down for the tax bill. (And I don't know about Sweden, but the IRS is pretty damn good at chasing asses.... )

Couple of other random thoughts...

http://www.nytimes.com/2008/09/17/op...hp&oref=slogin

Friedman isn't the only one making this suggestion. I think ressurecting some form of the Resolution Trust Corporation concept (used to fix the Savings & Loan crash... coincidentally touted then by some as the beginning of the end for the American financial system...) is a good option for ensuring a measured and rational liquidation of all this bad paper. There are other possibilities as well...

One last thing... to the comment about "printing money" and the implications... There is a little more to it than that in this case. The classic economic risk of loose monetary policy is inflation -- and that's effectively exactly what we got with low interest/easy access mortgages that bloated the credit supply and thereby caused house price inflation (which, funny enough, nobody was bitching about when they were shoving money in their shorts hand over fist... ) What we've effectively got with these defaults is equivalent to the evaporation of market cap. Asset A was worth $1M... someone bought it for $950K... now it's worth $400K. You've just effectively removed $600K from the (loosely defined) money supply. The governments guarantee of bridge loans is not increasing the money supply at all in terms of the total net value of liquid assets in the economy -- they're effectively covering a loss. This shouldn't have any impact on inflation. Yes, the govt effectively purchases a portfolio that prima fascia is not worth what they paid for it (government get a bad deal...? ... u forget we are the land of the $170 military toilet seat )... but the idea is that the net impact on the economy is less through this transfer than if left to natural chaotic creative destruction.

The big question becomes what the government is able to do to recover value from that asset. They did a good job in many ways with the RTC during the S&L years, so there is a precedent. Let's see how well they do this time...

Oh... and national debt is really only relevant as it reflects a % of GDP... just as $5K in credit card debt is completely different implications depending on whether you're talking about it residing on the balance sheet of a minimum wage earning college student or a 7-figure investment banker.