This proposal provides the authority to purchase the bad mortgages or other bad instruments from the holder like a bank.  My question is at what price?  For many of these there is no viable market or at least no one willing to buy. I understand the difficulty is caused by the Enron legislation that requires the bank to mark these to market while there is no viable market.

It's a question that I want answered too.  I don't know if I posted here, maybe elsewhere, but I want the purchase of loans to be punitive.  In other words either (a) all loans are bought at a discount or (b) banks pay some kind of recurring service charge starting in 2009.  My preference would be for a punitive purchase price--just as what happened with AIG.  There should also be full disclosure for any banks participating in such a program.  I have personal interest in this issue for two reasons: they're tax dollars and, more importantly, as an investor I want to find out which banks aren't affected.

Finally, for those that did buy into to these magic mortgages, they need to pay a price too.  If the government elects to fix their interest rate at a level closer to the 30-year fixed mortgage rate plus 100 basis points (one percentage point), then it should also be adjustable.  The outstanding balance should be inflated annually using the CPI for the year.  If owners can get themselves back into financial normalcy again, then they can re-enter the regular mortgage system and refinance, but there should be no free lunch.

One of the stated goals is to try to allow the people who purchased these homes to stay in their homes and continue to make mortgage payments.  However a holder of a $500K mortgage on a $400K home is not going to continue to make payments. Thus will the government reassess the value of the home, write down the mortgage to match the value and offer the homeowner a revised mortgage at some value below $400K?  If so it seems quite unfair to those who have continued to make mortgage payments.

They should stay in their homes, but I wouldn't necessarily mark the loan to market.  I'd play with the interest rates.  For those that took these adjustable rate loans, if they can't afford the loan at the 30-year fixed plus 100 basis points, or some other higher interest rate that their credit history signals, they could never have afforded the house in the first place; it might be harsh, but what they did was dumb and they shouldn't be rewarded.  Any rescue package needs to have a punitive element.

If the gov't pays the bank some reduced value it would seem they may be able to make a profit while keeping the homeowner in the home.  Of course this suggests paying the bank considerably below  the face value and resulting in a large loss to the bank.

I agree that buying loans at a discount is what's needed.  Banks get rid of non-performing assets; they take a hit on the balance sheet, but get an injection of cash; the also avoid the costs associated with repossessing and selling a non-performing asset.

I guess I am unclear on how this will work especially involving the pricing of these mortgages or other financial instruments.  Can anyone clarify?

They haven't given any details as to how it works and section 8 of the proposal is, perhaps, key, because the Secretary doesn't want any interference from those with party political goals in mind.  The big question is do we trust a man like Secretary Paulson to do the right thing?  We need a latter day J. P. Morgan to come in and save the system, working with the Chairman of the Fed and seeking advice from trusted luminaries such as Paul Volcker and Alan Greenspan.  There's a large element of confidence building in what will happen next.

We're not out of the woods by a long shot, but I am cheered that this week the government got the message that we are in the woods and need to get out!