Mortgage bailout plan is positive for US economy

US sub-adviser Marsico Capital Management has welcomed Congressional plans to throw a mortgage lifeline to distressed borrowers, a move intended to help stabilise the beleaguered US housing market, says Cory Gilchrist, manager of Gartmore's US Opportunities Fund and the Gartmore SICAV US Opportunities Fund.

Two US Congressmen have co-sponsored legislation that could rescue as many as two million households from foreclosure by allowing the Federal Housing Administration (FHA) to guarantee up to $300bn in refinanced mortgages. Noting the importance of the housing market to consumer sentiment, Cory adds "we feel that it's extremely important that the government craft a viable and meaningful plan, which will put a floor underneath the ailing housing market to allow a recovery to take hold."

Under the proposal, the FHA would guarantee new mortgages, issued for instance, by banks instead of buying up old ones, comments Cory. The old unaffordable mortgages would be replaced by new affordable ones (for up to 90% of the current value of the property), with the government assuming the risk of default. Existing mortgages would be bought below face value, forcing investors to "take a haircut," as the industry saying goes. Equally, the proposal would require homeowners to relinquish part of any property price-appreciation for as long as five years after the mortgages are refinanced. The proposal would apply to loans originated between January 2005 and July 2007 - homes would have to be owner occupied, with applicants presenting verified income and employment details. The proposed legislation has a 75-80% chance of passing into the books, according to one of the co-sponsors.

The maximum payout to the original lender/trustee is 85% of the home's reappraisal value and the difference would be recognised as a loss. In determining the economics of the plan, lenders will compare any potential loss to foreclosure costs, observes Cory.

Visible signs of a stabilising housing market could have an important positive impact on consumer and business confidence, lending activity and economic growth. If that scenario were to unfold, areas such as Consumer Discretionary and Financial Services could become quite attractive from an investment perspective, according to Cory.