In a plan just unveiled, the Treasury Department said it will remove up to $1 trillion in bad residential loans and toxic private-label mortgage-backed securities from the balance sheets of many financial institutions to jump start lending and revive the economy.

The plan will work like this:

Federal funding will be utilized to influence $500 billion in public-private funding to buy the assets, which the Treasury Department said could hit $1 trillion over time.

The objective is to utilize the private market to institute prices for assets which have halted trading or have had their market values plunge.

According to President Barack Obama, the plan will "allow banks to take some of their bad assets off their books, sell them into a market, but do so in a way that doesn't just obligate taxpayers to buy at whatever price they're willing to sell these assets."

Furthermore, Treasury Secretary Timothy F. Geithner said the public-private marriage is the most effective way to safeguard taxpayer money and get to the bottom of the financial crisis.

"Private investors will share the risk alongside with the taxpayer and the taxpayer will share returns," according to Geithner.

"There is no doubt that the government is taking risk," Geithner said, despite the fact "I am very confident that this scheme dominates all the alternatives for trying to find that balance" between cost to the government and effectiveness.

I am not particularly happy about his use of the word "scheme".

New FHA Head Named By President Obama

A former World Savings executive ( yes, I said World Savings), and current president of mid-Atlantic real estate company The Long & Fosters Companies, was selected yesterday by President Obama to run the FHA.

Here is a brief history of David H. Stevens: he began his career as a "loan originator" back in 1983 at World Savings Bank, before progressing to Group Senior Vice President, National Sales Manager for the mortgage division.

He then made his way over to Freddie Mac, where he served as Senior Vice President of the Single family business, responsible for all sales, marketing, business strategy, affordable lending, and product development for the firm.

Later, he ran the wholesale lending business nationally for Wells Fargo, before eventually making his way over to Long & Foster.

What I find interesting about this appointment by the President is the fact that, World Savings payment option arms killed Wachovia, Freddie Mac is in conservatorship, and Wells Fargo's wholesale presence is limited at best. 

I hope that this is not a trend.

To be fair, it is still unclear if Stevens was involved with any of those toxic option arms World Savings spewed out, or if his advising in affordability products led to the decline of Freddie Mac, but let's hope he gets things right at the FHA.

As of late, the FHA has taken on what may be the most significant role in the mortgage industry, accounting for a staggering 21.13 percent of market share late last year and significantly more in recent months.

The good news is the FHA seems to be taking some risk mitigating actions, such as limiting cash-out refinances (which I covered in last week's newsletter) and stamping out seller-paid down payment assistance loans.

Per most recent estimates, FHA loan production for 2009 is projected to be as high as $400 billion; so he'll be plenty busy, especially with defaults rising above 6.5 percent.