The problem with the current PPIP program is that no matter what incentives the government may throw in at the taxpayer’s expense, it will be the same junk changing hands. Garbage out and garbage in. There is no provisions in the current PPIP plan to let any private sector firms to make improvements to the troubled assets. The private sector firms are simply expected to sit on the toxic garbage and wait for it to rot further so that taxpayer’s money come to rescue in the end anyway. Nobody in their sane minds would want to buy them from the private sector firms. So it will end up only changing hands once. A real secondary market liquidity will not be created by the current PPIP program.
There seem to be many brilliant brains in the Treasury Department, why don’t they devote their energy and intelligence on how to devise incentive ways to let private sector firms feel motivated to improve the assets so that people will step on each other’s shoulders to fight for the chance to make a buck? No incentives from taxpayer’s money will be necessary.
The key concept to improve the PPIP program is that in their current proposed incentive buying and selling process, there will have to be value added efforts to increase the value of these legacy assets through effective innovative foreclosure prevention and loan loss mitigation methods. Offering non-recourse leverage to private sector firms by putting taxpayer’s money at risk while nothing will be done to improve the troubled assets is not sufficient. If there is a clear path to making trading profits for the private sector firms through adding value to the troubled assets, the non-recourse leverage incentives using taxpayer’s money may not even be necessary.
To borrow a simple analogy again, if the buyer of a fixer-upper dilapidated property is doing nothing to fix up the run down property he bought (i.e. fixing the leaking roof, doing a new paint job, etc.) he would not be able to sell it at a higher price to others in order to make a trading profit on the investment, no matter what non-recourse leverage you may offer him.
If the Treasury Department could instead focus on providing value addition opportunities for private sector firms by including the SwapRent mortgage loan workout assistance program to help credit worthy homeowners avoid foreclosures then there will not be much a need to use any taxpayer’s money as non-recourse leverage incentives. Politically the program would become much more acceptable since the SwapRent methodology itself operates on a pure free market mechanism. Fixed up and improved assets (less future default possibilities in the mortgage pools) could certainly help create the real trading liquidity of both the legacy mortgage loans and securities in the secondary markets through creating real buyers demand for these assets.
On how to do it, please read the earlier post below.
