Why $700 billion?
I was wondering about that. Zubin Jelveh has the answer:
[...] There are roughly $14 trillion in outstanding residential and commercial mortgages and five percent is also roughly the loss rate on those categories, he added. Five percent of $14 trillion is = $700 billion.
Nice.
"It's not science," Bernanke said.
There are a few problems with this simple straightforward calculation:
1. The bold move by the Treasury was to pay perhaps 50 cents on the dollar for the distressed properties - not 5% of the fair market value of $14 trillion residential and commercial mortgages. That alone reduces the requested amount to $350B using the Fed Chairman and Tres. Sec's own numbers.
2. Given the lending practices, the majority of the foreclosed properties are likely on the smaller end of the mortgage spectrum so using the $14 trillion number is not correct.
3. Finally, who has agreed to sign on to the idea that commercial property mortgage instruments somehow should be qualified in this bailout? Talk about a giveaway to business. We have heard the arguments about naive home buyers but naive business people? I guess if that is the case then poor Ken Lay of Enron was just naive too? Give me a break. The losses sustained in the commercial mortgage sector should be completely separated out as a separate issue.
Given average home prices of about $210,000 and about 1.3 M homes in foreclosure a bailout of $150 B is about right. Personally, I think that half that amount is all that should be applied because we need to have an adjustment in the market as housing prices have been way out of whack.