The failure of a key vote to pass bailout legislation on Monday has more than a few distressed mortgage investors stuck in a holding pattern, as they await a proposal that more so than most directly impacts their business models. Many say that while they know the Treasury's proposal will have a dramatic effect on their business, it's anyone guess what effect that may ultimately be. "It's a pretty vague proposal, surrounding pricing and assumptions on intrinsic value," said one whole loan trader that spoke with HW on condition of anonymity. "We think the Treasury would be buying whole loans, given the legislative focus on loan modification, but even that's not entirely clear. We're pretty much on hold strategically until that becomes clearer." Or until the current bailout proposal is killed, whichever comes first. The House of Representatives' historic rejection of a proposal to essentially nationalize the last remaining private-party mortgage market -- that's the market for distressed subprime and Alt-A loan products, as well as the securities they back -- gave some market participants the feeling that the government may yet be kept out of what one participant called "our sandbox." Friend or foe, still unknown "We’re all hanging around waiting to see how formidable a competitor the government will be," said one source, a managing partner at a distressed-loan buyer on the East Coast. "My trader seems to think TARP wont help as institutions will not be motivated to utilize the program to avoid getting the same stigma as if they used the discount window. "I don’t know where I stand, I just want to get more details of the bill before figuring out how we adapt." That sort of wide-open, everything-and-nothing is possible sort of take on the bailout proposal dominated most of the talk among investors in the mortgage markets on Tuesday. One distressed purchasing fund's managing director said that "everything is on the table," and that whether the Treasury's plan would work is anyone guess. "Sellers are faced with a dilemma," said the manager, who asked to remain anonymous. "[They could] sell assets to Uncle Sam, chip off a piece of equity, and agree to hamstring management, or sell to private bidders at a slightly lower prices sans strings. "Both options provide capital, but banks and financial institutions are going to have to make tough choices in the next few months." Part of those tough choices, investors and fund managers told HW, involve realizing that moving the risk of illiquid assets around -- whether to private-party investors or the government -- does little to reduce risk in the system or alter how assets are fundamentally managed. "If the federal government wants to get into the asset management business, we all may as well write the check for taxpayer losses right now," said another managing director at a distressed-loan purchasing specialist. "This business is much harder than it looks, and the issue isn't as simple as holding to maturity or a desire to be aggressive on loan modification." Some sources, as a result, expected that the Treasury proposal could end up being a boon for distressed mortgages. "They'll find out they need to churn and burn whatever they buy," one source suggested. "That could mean the market for whole loans will really start moving, with the pricing hurdles removed."