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Once housing bottoms – and with the Federal Reserve finally lowering mortgage rates sufficiently Cramer is confident we’ll see a bottom by June 30 of next year – this mortgage paper could bring sizable returns to those that hold it. But the problem right now is that no one seems willing to agree on a price. Buyers bid low in fear of further declines in value, while sellers offer high so as to not incur big losses.
Originally, Paulson said he’d use the $700 billion TARP money to buy up this troubled asset class as a way to stabilize the markets. But then he started giving most of it to trouble banks instead. Regardless, Cramer’s plan wouldn’t require any money or demand the government buy this mortgage paper. In fact, he thinks there’s a chance for the government to make some money here.
Right now the problem isn’t the paper itself, Cramer said, it’s the spread between buyer bids and seller offers. So he wants to set up a government-led trading desk to help find a compromise for the two opposing sides. If a buyer wants to pay only 30 cents on the dollar, but sellers are asking 50 cents, the government would bid 39 cents and then sell for 41 cents, pocketing the 2-cent difference.
Cramer thinks this is just the move needed to add liquidity and transparency to this market. Both parties can feel safe about the transaction, and the government makes some money. The profits could be split between the FDIC and the Treasury, the latter to return some profits to the taxpayer.
Worst-case scenario? The government makes the wrong bid and ends up holding the paper it has bought. But if you believe as Cramer does that housing on the whole will turn up, then this might be the only time a buy-and-hold investing strategy will work. Let’s face it, the Treasury’s got all the time in the world. It can afford to wait for an industry bottom. Once that happens, that mortgage paper should be worth a lot more.
Cramer said this “Federal Mortgage Investment Bank” will finally help the market value these bonds. And it’s this uncertainty that’s clogging up the system.
“It would solve so many of our problems with so little capital,” he said, “and actually make the taxpayers money.”
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