There were three important developments in mega mortgage refinancing story in the past week. Clearly there is something in the works. The questions are, “What?” and “How big?”
This first sign came from the Presidents’ speech. He spoke of a ReFi. But he had not one word of detail. Still there are clues:
My administration can and will take some steps to improve our competitiveness on our own.
We’re going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent.
I know you guys must be for this, because that’s a step that can put more than $2,000 a year in a family’s pocket, and give a lift to an economy still burdened by the drop in housing prices.
The WH provided a breakdown of where the new stimulus money would be spent. There was not a nickel in the proposal to cover the cost of any new ReFi program. Note that O states that he can do a big ReFi “On our own”. This means that he has the money in his pocked to do something. He does not need congress to okay a new plan. (There is $25+b of old TARP money, there is an additional $35b available from the previously funded “Hope Now’ program.) The point is that there is money around with no string attached for the President to pursue a ReFi.
The second thing of note is that late Friday afternoon a was letter released by the FHFA. There was a very significant softening of the language regarding the terms for refinancing:
FHFA is also considering the barriers to refinancing mortgages that would otherwise be HARP eligible but for having a current LTV above 125 percent.
Our objective is to provide borrowers in high-LTV loans who have a history of making on-time mortgage payments with an opportunity to refinance, resulting in reduced credit risk to the Enterprises and added stability to housing.
Bingo! The current ReFi restrictions that require a borrower be no more than 25% underwater and have a 780 FICO are about to be waived.
The final bit of data comes from the CBO. They did an analysis of what the implications are of big refinancing might be. I contacted the CBO on this and they were very clear that the work they did on this topic was not a report on a specific proposal, but rather a generic review.
It is probably correct that any plan that the administration comes up with will vary in scope from the review by CBO. It is also correct that this review has been done in anticipation of a specific proposal. Therefore the review and the conclusions are worth noting. The key assumptions used in the analysis:
- Eligibility includes existing loans guaranteed by Fannie Mae, Freddie Mac, or FHA.
- A borrower must be current on an existing mortgage and must not have been more than 30 days late on any mortgage payments during the prior year, but there are no limits on the borrower’s current income or on the loan-to-value ratio of the new loan.
- The new loan has a fixed rate of interest, at the prevailing market rate, and a term of 30 years.
The CBO has concluded that there are $4.3 trillion of mortgages that broadly meet the above requirements. These mortgages have been converted to Agency MBS. The report looks at what were to happen if 10% in that universe were restructured. The following chart looks at the results.
The bottom line is that 2.9mm homeowners would get a benefit of .5b (each year) and the net cost to the government would be a one time hit of only 0mm. A nice trick. Note the individual gain and losses. The losses come from a write down of the value of MBS held by both the Fed and the GSEs.
So how can this be? Where does the money to achieve these results actually come from? That’s easy. It comes from the poor bastards outside of government who own the Agency MBS. From the CBO:
Those investors are expected to experience a disproportionately large fair-value loss of to billion.
Ah! It all makes sense now. Savers are going to pay for the ReFi. The CBO makes this fact very clear:
Most of that wealth would be transferred to borrowers.
Based on all of the above I believe that there is a ReFi plan in our future. This is what I think it means:
- We get a program that targets 0b to trillion of mortgages.
- The program will start on 1/1/2012 and end 12 months later.
- The consequences to the MBS market will be deferred for 4 months. Thereafter the increased monthly redemptions will flow through the MBS market at a rate of 70-80b per month. While painful, this will not result in a collapse of the MBS market (but it could…)
- If T of Refi were accomplished, it would result in increased demand for yield curve protection by all participants in the mortgage market. This would, by itself, tend to push up interest rates in the 10-30 year maturity.
- To offset the market implications of #IV the Federal Reserve could respond by absorbing the risk. This could easily be accomplished with “Operation Twist”. If the Fed were to sell some of its shorter maturities of Treasury bonds and simultaneously purchase coupons with an average 15-year maturity, the market implications of the Mega ReFi would be neutralized.
My Take
We are going to see a ReFi proposal along the lines described above announced in the next few weeks. This will justify the Fed to initiate trillion of Operation Twist. That announcement will come on September 21st.
MBS holders will get hit on the head to the tune of b. But no one cares about them any longer. Punish the savers.
Source: BruceKrasting.blogspot.com
