… 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.
