These deals are usually structured as private offerings to avoid a lot of the legal regulations that regular mortgages and securities exchanges have to comply with.
The result is that the securitization business is effectively an alternative banking system that has avoided the normal rules that provide checks and balances on our traditional banking system. And now it is in a shambles and this is causing our economy to falter. The economy is our social structure, so this disruption is our business and thus our government has the right and responsibility to get involved, diagnose the problems, and find and execute solutions. This is what makes this problem our business and the business of our government. We do not have to sit by while these greedy knuckleheads ruin our nation's economy.
In case you missed it, the last paragraph was a political statement advocating a change in government policy. I'm just saying.
Here is the solution to the immediate problem. It is two-fold.
On the macro scale, the Fed or Treasury will form a special guaranty agency that will provide secondary insurance to buyers of pools of mbs bonds for half of their aggregate face value. This will provide a floor on mbs value at 50% of face value. This will at least stabilize the secondary market, albeit with a lot of pain, but not allow securities holders to avoid the moral hazard of their risky investments. The good news is that there are hundreds of hedge funds out there with billions and billions of dollars who see this whole mess as an opportunity to buy these mortgage backed securities, or even the mortgages themselves, as vastly undervalued assets. This is what hedge funds are best at. So there are willing buyers. The big problem is that there is currently a dearth of financially healthy companies available to service these performing or semi-performing mortgages on a third party basis. (Mortgage servicers are in financial trouble because of what is called "servicing advances." Don't ask.) "So what?" you ask? Well, a servicer is required for our willing buyers to also be able buyers. So we do have potential investors who will buy these mbs pools at fire sale prices, if they can find someone to manage the loans for them.
On the micro side, a new program is needed that will provide new mortgage insurance on otherwise undoable refinances, up to 80% current loan to value of primary residences. As a condition for this insurance, the current holder of the mortgage will be required to provide the homeowner a loan for the balance of the amounts owed, on the same interest rate and term as the new mortgage. This will proved homeowner relief, without paying off the lenders who made irresponsible loans.
The solution is in sight. We have to shove this crap through the system or face the financial cesspool that Japan has been stuck in for 20 years. Let's take our lumps now and move on.