Banks and mortgage companies have been rallying today on the positive comments from Ben Bernanke and word that Treasury Secretary Paulson has been meeting with loan servicing companies and other executives in the mortgage industry to work out a plan that would extend lower, introductory interest rates on home loans before they reset at higher levels.
Can the Paulson plan work? We don't know. First, we don't have details. Second, traders have noted this morning that we have had similar discussions about government programs for insured loans, and even a Super SIVs program (remember that?), but there is either little follow through or the program ends up considerably smaller.
Suppose it happens and we can actually freeze the resetting of ARMs. It's not clear what this does to the mortgages that have been securitized. Do you need to unsecuritize them, then re-securitize them with the new terms? Lots of legal issues. Still, at least some attention is being paid, and that's what traders want.
What will happen next year? David Bianco at UBS echoes many other strategists by trying to say that 2008 could be looking a lot like 1991. Bianco says: "The situation now resembles year-end 1990-a credit crunch, war, high oil prices, recession fears. PE ratios were similar, but interest rates were much higher in 1990. And then, despite an actual recession, the S&P 500 rose 26% in 1991."
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