Private Equity and Investors Resurrect Idea to Buy Troubled Mortgage Loans

Funny how ideas can come full circle. It seems some private equity and investors think US Treasury Secretary Paulson's first plan was a pretty good one--buy troubled mortgage assets of bank balance sheets. In fact, a few have offered to take that opportunity with the government's help.

Let's flash back in time for a moment. Paulson came racing to Congress with a mortgage crisis turned credit meltdown. His case was simple. There are billions of dollars of troubled mortgage loans clogging the flow of credit between banks fearful to lend. His solution seems logical. Have Congress authorize the US government to buy these toxic mortgages and free the flow of credit and sell them back into a healthier financial markets.

Congress agreed to this plan after much anxiety and debate. A process that gave us the Troubled Asset Relief Program (TARP). However, as soon funds are releasedPaulson decides to go down a different path and capitalize large financial institution, an approached first taken by British Prime Minister Gordon Brown with his similar crisis.

Now, moving forward a few months we have seen the contagion effect of toxic mortgages, falling housing prices, and constricted credit infiltrating every aspect of our economy.

The US Treasury, Federal Reserve, and FDIC continued to pump in billions in cash and guarantees, but the troubled mortgage assets still sit on the balance sheets of our major banks.

This has peaked the interest of private equity players like BlackRock and private investors like Robert Johnson. They are thinking they may want to help the government execute the original plan with a little private money.

BlackRock has proposed that President-elect Obama go back to the basics of the Paulson Plan and buy these mortgage assets and new mortgage assets at 4.5 to 4.0 percent to drive up new demand for mortgages. No doubtBlackRock is very interested in helping the new administration manage those assets, as one of the largest US asset managers.

Meanwhile, the owner of the NBA Charlotte Bobcats and founder of Black Entertainment Television Robert L. Johnson is interested in lending his bank, Urban Trust Bank, to the cause. His plan would take $1 billion in government money and use that to raise another $7 billion to convert Urban Trust Bank into Homeowners First Bank. This bank would then focus on helpingservicers pay defaulting borrowers payments, giving them time to modify mortgages.

As government money and guarantees go into supporting banks and mortgages we are sure to see more of these private plans. Declining equity investment returns and broadening weakness in other sectors will make these government guaranteed toxic mortgage assets look more attractive.