Not entirely correct. The proposed plan calls for the US government to buy failing "mortage backed securities" from ailing financial institutions. A mortage backed security is not the same as a mortage. It's basically an "asset" whose value is backed by underlying debt. The owner of the security does not have any claim on the underlying collateral (property), only a claim on whoever packaged the security. A lot of the panic around Lehman folding is because many other banks and funds were holding mortage backed instruments issued by Lehman, all of which are now worthless since Lehman is bankrupt. This is my main concern about the current bailout plan. The government should, if anything, be buying up the mortages themselves. They should absolutely not be buying up any derived instruments.
But the mortgage backed security is as it implies BACKED or collateralized by the mortgage which liens the real property.
The problem as I understand it is that these mortgage “packages” that were sold contain good as well as bad loans and the problem is no one knows what pkgs have what bad mortgages in them. In a worst case scenario 20% of ALL mortgages go bad and if that is the case then 80% do not. This means that if the gov’t lays out 700 Billion it will recoup 80% or 560 Billion. It will be a 140 Billion hit but not nearly as bad as the 700 Billion number being tossed about.