When mortgages and housing are stabilized by the program, market forces will determine the values of mortgage-based assets.
The most obvious — but not the only — disasters stem from mortgage delinquencies, fears of more, and consequent uncertainty about the values of mortgage-related securities.
The most obvious problem has been the jump in subprime mortgage defaults and the ensuing collapse in values of mortgage-backed bonds.
When home values decline, the values of mortgages often don't.
But the nominal value of mortgage debts would remain fixed.
With house prices falling anew, further reducing the value of mortgage assets, how reasonable is that?
Wall Street banks would also be forced to write down the value of mortgage securities they had protected through the guarantors.
Cendant said yesterday that third-quarter earnings fell after it wrote down the value of mortgage servicing rights as homeowners repaid loans faster than expected.
These were synthetic bets on the value of mortgage securities with one party taking the long side and the other the short.
