The Contrarian: Give investors what they want

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Guest blogger James Waggoner, host of ‘Real Estate Radio’
on KCLA-FM in Los Angeles, makes a modest proposal tonight: If investors in mortgage-backed securities insist on expecting the worst, then why not give them what they seem to want?

‘First it was Countrywide. Then, one by one, each of the Wall Street banks trading mortgage-backed securities took ever larger write-downs. Now, in one single transaction, the fifth-largest firm on Wall Street, Bear Stearns, is wiped out of existence, literally overnight, erasing over $3 billion of shareholder money (almost $20 billion in the past year) and possibly putting as many as 14,000 hard-working people out of jobs.

‘This all happened not because some Wall Street robber baron ran off with cash but from the market’s belief that as many as 30%-50% of publicly traded mortgages would either be delinquent or default altogether. The current level of delinquency or default is about 8%. If all that I have just stated is true, then it follows that the only logical buyers of these securities are investors who expect the very worst and will be perfectly content with a default rate far higher than the current 8% level.

‘So I say let’s all give investors what they want. Let’s all stop paying our mortgages for 60-90 days and renegotiate a loan that is not only one-half to two-thirds the original amount, but with one other consideration -- LOWER INTEREST RATES! After all, while mortgage-backed security prices have been falling like a stone, so have interest rates.

‘Is all of this absurd or perhaps impractical? It is actually a modest proposal. The damage to the financial system has already been done. Why should only a very small minority be bailed out while the rest of us continue to pay unrealistically high sums that will only deepen the current recession? The time to act is now.’

Thanks, James.

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