I read on Bloomberg.com last night about Bank of America buying 2 billion dollars worth of preferred stock in Countrywide and while I think that this may be a good thing for the mortgage markets in general because it might inject a dose of much needed confidence into the market, it also made me wonder about what this might mean for the little guy?

What were the terms of the issuance of this stock?  Were there any assets that were provided as security specifically towards this class of stock?  If Countrywide does indeed go belly up, is BOA going to hold claim to real estate or some of Countrywide's various subsidiaries?  If this is the case, does it weaken the position of the common stockholders?

Another thought that ran through my mind when it first because public that Countrywide was having problems and folks started talking about the government bailing them out was, "What about the little guy?"  Why would Countrywide getting bailed out get so much chatter when there has been very little said about helping the poor slob who saw one of these adjustable, non-conforming mortgages as their only way to grab a piece of the American Pie?

I've written before where I stated that I didn't have a bunch of sympathy for people who took out these mortgages and I still pretty much feel that way.  At least when I hear them trying to blame everyone else for their problems by saying things like, "That evil mortgage broker never told me....." etc.  I wrote about this in my post, "Stop Blaming The Mortgage Broker"  That said, the problem has reached a point where even if the people who got suckered into these loans were stupid, that for the rest of our collective benefit, it's time for the government to step in and put a stop to it!

The Federal Government is the only entity that has the authority to do something about the situation that these folks find themselves in.  The loan servicers don't have the authority to unilaterally change the terms of the mortgages that are in trouble.  Only the US government has the resources and authority to buy these mortgages and recast them under terms that would avoid foreclosure for the majority of these people. 

Yeah, the government is probably going to get burned on quite a few of them, but even on these properties, the government can hold them off of the market in a manner similar to the price supports on farm commodities.  By liquidating them in an organized, systematic fashion it would allow the market to absorb them in such a way as not to hurt the rest of us.

On top of this benefit, how about the social benefits of keeping families, who would otherwise lose their homes, in their homes.  I suspect that there are a lot of people out there in dire straights that wouldn't otherwise be if it weren't for the Draconian mortgage terms that they are now facing.  

I imagine that quite a few of you would view this sort of bail out of the little guy as some sort of government handout and it might indeed be just that.  However, how is that different than the Fed pumping money into the banking system by cutting the discount rate?  Other than indirectly (from the markets in theory stabilizing), are you going to benefit from this move?  Unless you own a bank and now have cheaper access to funds (that don't have to be used to buy mortgage backed securities, by the way) you're not going to benefit!  I can appreciate the psychology of it, but it's still basically the government cutting the big guys a break, while leaving the little guys to bake!

As always, I'm curious what you guys think!  Please let me know by commenting on this post.

Bob Mitchell

ValueList Real Estate Services, Inc.