October 4, 2008

Mortgage Debt: Getting to True Value

JP Morgan Chase recently bought Washington Mutual and all of its banking business. When they came up with the winning price they had to take a hard look at WAMU's assets and try to exact a reasonable value for its mortgage assets.

Now at a time when no one is buying mortgage debt because they have no idea how to evaluate them, looking into JP Morgans evaluation gives us a glimpse, at least, what financial institutions think they are worth.

JP Morgans assumptions are far more worrisome for the banking industry than previously thought. In a presentation on its WaMu acquisition, J.P. Morgan forecast a 58% peak-to-trough slump in California home prices if the U.S. enters a severe recession. In Florida, house prices could fall 64% in such a scenario, while nationwide prices could drop 37%, the bank said. WaMu's $51 billion option adjustable-rate mortgage portfolio will reach 20%. (via marketwatch.com)

As you know, the deal went through, meaning that neither institution really argued with the numbers or the dismal forecast. No doubt, these assumptions will be used as a template for the upcoming auctions that will be held by the Treasury.

Im told that the Treasury will use some of the $700 billion to host auctions of mortgage assets to try to determine a price for them. We are in such uncharted territory that Secty Paulson said to Congress that the only way to value them is to put them up for sale and see what happens. Imagine that!

Presumably, those assets that dont sell will be bought by the Treasury and managed until they can be sold at a later date. Here is where we will see those mortgage workouts that reflect the new true value and hopefully we will keep more people in their homes than the Banks will.

Part two will be to get creative about what to do with all of those homes already on the market. The so called suburban ghost towns. Inexpensive retirement communities? Non profits centered around larger community needs, such as career re-training programs, small light industry centers. Farm land? anyone....

Thanks for Reading

Howard Bell


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