Makes me wish I had poor credit and got a stupid loan a couple years ago. This won’t fly, though. It’s simply a veiled threat to the industry to try to make some progress on getting more folks out of suicide loans.

… but if it did happen, it’s a huge windfall to the borrower.

But here’s the problem…

… let’s say I’m a thrift executive and I’ve got a bunch of $400,000 loans at 3% teaser rates that “should” be indexed up to 7% (or pick a number greater than 6%). So now I’m going to reduce the rate back down to 3% and fix the loans at that rate. So, dear readers, what’s the value of these loans if the terms have been changed such that the borrower has locked in a 3% coupon?

(Imagine yourself owning a government bond yielding 6% in which the coupon got cut in half… permanently. What do you think that would do to the market value of your bond?)

Let me tell you what it ISN’T worth: $400,000 or anything even close to $400,000. This loan is now probably worth $200,000 (or less) if it has to be sold in the open market. So, is the all-benevolent FDIC going to allow these companies to not only fix the loans at the previous teaser rate but ALSO allow them to keep these loans on their books at the original par value?

That is so completely ludicrous from a “safety and soundness” perspective that I could actually see it happening.

I don’t think that there are many institutions that hold these loans. They were sliced and diced into CDO, MBS and sold off on Wall Street to anyone and fund managers that were looking for higher returns.

Is addition rates aren’t 3%. A prime borrower might have been 4-5%, a sub could be 6-8%.. Still not that bad of a return.

There is very little cash value to these today, so they just don’t value them. It’s better to keep it hush hush and get interest payments, with the true lack of value buried.

There are pension managers, life insurance companies, hedge fund managers, city and county treasurers that sre very concerned these days. Some will be out of a job as soon as their losses are exposed.

A bank money market account that is NOT FDIC insured could also have exposure. You own “shares”

Nobody really knows how much is out there, but it will make Enron look like child’s play.

Some of the losses will be buried forever and never get exposed.

The Wall Street folks already took their cut off the top.

HLS, I think we have some confusion regarding terms. When you say, “I don’t think that there are many institutions that hold these loans,” I think you mean many “depository institutions.” Correct me if I’m wrong. (Otherwise, you point out correctly that pension funds, insurance companies, hedge funds, etc. own lots of these mortgages via CDOs, CMOs, etc. – these are undoubtedly “institutions.”)

While it’s true that most of these funky loans are wrapped up in securitizations and are not owned by depositories, a HUGE amount – in the hundreds of billions – are still sitting on the balance sheets of traditional depositories like Downey, First Fed, WAMU, Wachovia (formerly Golden West), Countrywide Bank, etc. Believe me: the thrifts and thrift-like banks are sweating this situation – they’ve got boatloads of direct exposure to the dreck.

Regarding bank money market funds, yes, technically you’re correct that “A bank money market account that is NOT FDIC insured could also have exposure.” But this is a bit misleading. The exposure here is largely to the money market fund “breaking the buck,” so to speak, because some portion of its short-term investments go sour. I defy you to find a single “bank money market fund” that is not FDIC insured.

There may be a very VERY small handful of traditional banks in the United States that don’t carry FDIC insurance. But their numbers are so small as to be inconsequential. FDIC insurance is a sine qua non of operating a traditional bank.