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On the Mega ReFi Rumor
Last week there was a widespread rumor that Washington was thinking
about a massive ReFi of home mortgages. I thought it was ridiculous.
There may be more to it then I first considered.
The story version I was told was that 50% of the borrowers from Fannie and Freddie would get a letter that says, “We are lowering your rate to 4.5% fixed. Just sign and return”.
I have a bunch of problems with this. Economics and fairness come to
mind. According to the Fed the 1-4 family mortgage market is $10.7T
(this is where the problems are). Of that Fan and Fred have 4.6 T. The
numbers:
If half of the GSE borrowers got the “Happy Letter” it would mean that
on average 12mm households would get 1% off their loan. This comes to
$23b a year or $1,900 per household. That sounds nice, but $23b is
chump change these days. It is about $150 per month for the lucky
winners. It really would not alter the course of what will come for the
economy. Also in this equation must come the part that less interest
paid to bondholders will have an offsetting negative impact on demand.
Net net I saw no compelling upside to the economy in the rumor.
The plan as discussed would have been subject to a lot of criticism. The
idea that only 12mm out of 50mm are eligible for the FF Lotto is a
nonstarter in my opinion. You can’t win the Lotto because your mortgage
is with a Community Bank? It gets worse. The criteria for eligibility
would have to be based on payment history. If you paid your mortgage
these past few years your pal Uncle Sam was going to give you a break.
Translate this to mean that only those with higher incomes who did not
suffer in the last few years would get this break. No Sale. The
Administration would not like that result.
What bothered me is how broadly this issue was discussed. It was not a
rumor; it was a “talking point”. It had legs and was even supported by
the likes of Morgan Stanley. It made no sense to me. I have been asking
around and got a different perspective from a few folks this afternoon.
One lady in Washington told me that I had the numbers all wrong. The plan is to:
- Include Freddie Mac’s $.9T in the program.
- The eligibility criteria would be based on payment history, but it
would be set at levels such that 70% of all Federal borrowers would be
eligible.
- The interest rate incentive would be substantial. The new rates would be below market. 4% is a possible target.
By the numbers this would put $60b back into households annually. So
this adds up to a much bigger number. One that would help repair
household balance sheets. It would imply that only 20mm out of 50mm
would get a big win. It would mean that those owners that got clobbered
the past few years, the renters, and the investors in mortgage
securities would all get Dick’s hatband.
When I pointed this out she responded, “You don’t get it. This is not about the borrowers. This is about the lenders”. I said, “Huh?” Her take:
D.C. is worried about defaults. Strategic or otherwise. They are doing
everything they can to hold it off. If the economy slows they will get
hit hard on new defaults. This reality threatens everything. The
objective of this plan is to ward off future defaults at the GSEs. The
hitch on the 4% ReFi will be that if one fails to pay on a timely basis
going forward the old rate is reapplied. That is a powerful incentive,
even if you are underwater. At 4% your average house costs more to rent
than own.
The “fairness” issue I thought was important, is in fact a non-issue.
This is not a solution to the nations housing problems. Fairness is not
the objective. It is a way to protect the GSEs. It is the equivalent of a
CDS purchase by Treasury. They are paying the GSE borrowers not to
default. From this perspective the Mega ReFi plan has better optics. It
might even make some sense. But it is still a screwy idea. The fact that
it is even being discussed (including some of the ulterior motives) is a
measure of just how desperate the thinking has become.
A completely different take comes from a fellow I know on Wall Street. His thoughts:
PIMCO and Blackrock (the major managers of government assets etc) would never “allow” it.
The lady in Washington had this to say on that:
“To hell with the money managers.”
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A year ago I paid $7K (including points) to refi down to 4.375%
If 12million will get the same adjustment for free, I promise to stop paying and funnell all the "saved" money to start a new politial movement: SDP - a Strategic Defaulters' party.
Hopefully the 38million of mortgage holders who won't get the "adjustment" will join me...
Hit 'em most where it hurts - pay it off.
Life on the other side of the mortgage curve is a lot more sunny and warm, then never touch the time-based-goods again.
In your case this last weekend my buddy closed a 30 fixed for 4.125, no points.
Thanks for the great article!
This is all about strategic defaults.
Every default has to become a realized loss for bank.They can postpone it by not foreclosing immediately or keeping the house as shadow inventory after foreclosure (and pretending they will be able to sell the house later at no loss), but both measures have been used extensively already and the number of defaults is still rising.
So lets offer another carrot, so the debt serfs remain complacent and the banks can continue to pretend their mortgage principal will be paid back in full, some day.
When the fat lady (One lady in Washington) in Washington is willing to go public (sing) we'll be abel to assess the quality of her comments -- not before. There are a lot of ladies in Washington, including the one who runs the deli on the corner.
Are kidding? Ben Bernanke talks to J. Hilsenrath at the WSJ every week. It is all background. No one will talk for the record. I wish I could deliver that. Can't. Just a dumb blogger.
Well, no, I'm not kidding. You didn't give us a hint as to whom you spoke with. Usually it amounts to "informed sources", but we didn't get that. A chat with a lady taxi driver would qualify your source. "One lady in Washington..."?
Tracy Alloway at FT.com did an article on this topic. She referenced this piece:
http://ftalphaville.ft.com/blog/2010/08/03/304301/hitting-the-reset-butt...
She made reference to some language that I used that was a tad off color.
I (too) often fall back on expressions I heard/used on wall street. This is just one of them. Typical usage of this phrase might be:
Q: What did Sally get as a bonus?
A: Dick's hatband.
Q: At the end of the day what did Fannie Mae Pref holders get?
A: Dick's hat band.
Q: What's a 40 year old going to get back from Social Security?
A: Dick's hat band.
The ugly humor of wall street was part of the fun. I'll watch my language going forward....
bk
Bruce, a fine article, but short on meat. Come back when the idea(s) have been fleshed out. Flailing around in the dark does not move the ball forward. It is apparent that the morality threshold has been crossed. When the banks got bailed out the populace smelled a rat. It's not a matter of how many billions would be transferred in a new mortgage scheme; what matters is that $1 went to someone who did not "deserve" it. It's all about perception, not fact. And the facts point to a dysfunctional market/government combo. The shark was jumped long ago. Happy Days is a goner.
Me: You can say that again!
Lady in DC: Okay...
“To hell with the money managers.”
" I have a bunch of problems with this. Economics and fairness come to mind."
Bruce you are a shill, a complete corporate facist tool.
We live in a world where only corporations get the all-you-can-print buffet for failure, the rest eat crow.
In all fairness, with the above statement your credibility is shot to hell.
Exactly the words my ex wife used. Give me a break.
Done, who doesn't enjoy the wife buffets.
Seriously though, I can think of 787-Billion reasons in under a second where fairness was thrown out the window.
It is the taxpayer that needs a break.
So.........How does Mr. Market react if this comes to pass?
How many of the "winners" in this are currently not making payments? Why would they opt to start paying again (even at the lower "refi" amount) when they've already figured out that the bank needs them more than they need the bank?
Aside: Wow, when did captcha lower its standards 30 times ____ equals 30
Captcha doesn't want to know if you are smart, just that you have an organic brain.
Same as the folks in Washington.
OK OK if it is about the lenders, why not go them all one better? I proposed and was shot down last year what I looked at as a fix. I understand why it was shot down and agree. BUT, if they aer willing to do this now, why not go back and re-visit my solution. YES its painful, and the people who bought the repackaged (securitized) mortgages get fucked the hardest.
First....take all NEW mortgages sold from 2005 through 2009 (end of year), not the re-fi's. Convert all of the mortgages into a principal only loan. Claw back all payments made and immediately apply them to principal. This will reduce the amount of the loan in proportion the value lost in their homes. Starting in 2010 the mortgage automatically defaults back to a conventional 30 year mortgage (or whats left on it) including all interest owed. With the lower principal amounts outstanding yu are automatically reducing the interest payments going forward and the amount of the "NUT" you owe each month. This will put a lot of those underwaer home owners back in a position to pay their mortgage. This will prevent a lot f those home owners from walking away or selectively defaulting. This will screw the banks a bit, but it will prevent them from having to write the loans down when they ultimately foreclose on the owner.
Yes...it really is that simple.......
"The interest rate incentive would be substantial. The new rates would be below market. 4% is a possible target."
Why not just make the rate 0% and all will be right with the world? Since ability to "make the monthly payment" has become the generally accepted criteria for extending credit, by my calculations the average citizen should be able to borrow $100 million....as long as we make the interest rate low enough.
beware of talking points it is a very old game - as you focus in one direction on the discussion - in the other direction your wallet is being stolen from your back pocket.
it seems the talking point's focus is to have the market participants be mesmerized by a "rapid" rise in asset price (jump on board the market is pricing this talking point in) methinks i will keep my wallet in my hand and short this rise.
what say you?
This proposal is meaningless without a huge haircut in the principle. There is little incentive for most people to keep an asset long term if it has huge negative equity. They will play the "game" until they develop an exit strategy. Once the negative impacts of defaulting become known and they can be mitigated, most intelligent debtors will bail. Most Americans are too stupid to plan their "escape" so they will be subjected to the worse case effects of defaulting on their debt.
I for one want everyone in debt to be responsible for every penny they borrowed. There needs to be serious pain inflicted on those who aided the Banksters in this massive fraud. Anyone who did not see this coming 10 years ago and plan for it is a moron.
I also know the elite will never be held accountable for this and other massive frauds. The main reason for this is the average American is a moron.
See my answer below...it includes a principal haircut, without awarding anyone a cut. The home owner creates its own principle reduction through the clawback.
in other news, congress decided that those with excessive credit card balances, say over $10,000, will have their balances and rates cut in half. also, all those evading the income tax will have their rate permanently reduced to 5% to increase payment compliance.
Bruce, isn't it really more about 'terms' than 'rates' ? People who purchased a home in 2003-2007 quite often got a loan that was 4X-6X income, when the old rule was 3X income. I don't see how lowering the rate to 4.5% lowers the possibility of strategic default for most who purchased with those terms.
The day is coming when we pass the inequity Rubicon, and the not-so-critical masses become critical mass; you can't continue to "gift" some and shaft others. But the ignorant, arrogant, compromised button-pushers are capable and worthy of such nonsense, so I won't be surprised "this time."
"I wonder what it would take to get to that tipping point ..."
We are already there ... the media and the statisticians
are desperately trying to fudge the numbers and avoid reporting it,
but the populace is participating in a "quiet" revolution,
a massive passive resistance,
and the movement is growing by leaps and bounds ....
Bruce
Any word from the "lady" in DC on timing?
This is something for discussion and is not policy at this point. It is on the bulletin board of things to do. I doubt we will see it. Too whacky. I think they have easier things up their sleeve. I think Fed will buy more Treasuries and MBS first. That may come this week.
The ones that rent would pay less rent as a result because the house to buy cost less. The really scarry part is that is would once again supress the house prices even more so that will be a double hammer for the mortgage high income funds. They would be wiped out.
But the people, the ones that own and rent would indeed profit in the short run. Home owners will lose more in the long run.
Why stop at 4%? Since we've already gone down the rabbit hole and in the spirit of the Fed, drop rates to 0%. Do I smell re-elections?
Don't forget , there is a bonus for those boomers whom have no mortgages. For being wise and frugal , they get to pay for the 4%'s in lower savings rates from the banksters . I hear there are many sales on matresses right now .
How does one not "play any more"?
If you are involved in a crooked game, you do not play anymore by taking your money away and not putting it in the game.
I think the main reason that Wall Street and the government feel that they have been forced to PROP UP their new leading indicator (the Dow) is because even people with money, but no foreknowledge of the manipulation schemes, see the stock markets as a crooked game and have refused to participate.
One scenario for the government and ruling class is that the general populace stop paying their financed debt and stop paying their taxes. Everything in government and banking comes to a screeching halt ...
... I wonder what it would take to get to that tippng point. People would have to feel that the risk of persecution/prosectution by the government would be minimalized or that they have nothing left to lose.
The US government would continue printing to pay their people. The local governments would start printing their own currency (ala Kaleeforneeaa) to pay their people. Education and municiple services would have to be privately funded. It would be a mess since there would be no real basis to assess the values if the various fiat currencies.
What I think will happen instead is that we will muddle along for the next 20 to 30 years with a decay of government and until we can no longer afford foreign made goods and foreign resources (unless taken by force) and we will have to develop alternatives that will become valuable domestically and in foreign markets. In this case, the greatest risk is that the ruling class tries to maintain their power based on their old positions in the old systems and continue to drag us down ... but now at the point of a hired gun.
People are resilient given time, persistence and when the governors are taken off.
Hello, anyone at home. You have a masive Ponzi scheme. the only thing keeping the people in power is that ponzi scheme. the scheme is starting to fail. you will do what ever you can to keep it going. Like all ponzi schemes you keep it going now and it blows up in the future. I do not understand why folks keep looking for rational behavior fom those that run the ponzi scheme.
Could not have been put better. The only question is, what inning of the game are we in - 2nd, 7th, maybe the 9th.
"There be no shelter here" Rocha
Exactly. Across the spectrum we have a dying patient and the "doctors" have nothing left in their arsenal but band-aids to cover deep razor cuts... bleed out inevitable.
+1
Unintended consequence ... underwater home owners, in an attempt to hold on to their 'new' mortgages would really, really cut spending ... consumption slumps.
Another Unintended Consequence:
Housing turnover grinds to a halt, as below market mortgages lock people into existing homes, even if they'd otherwise consider trading up, moving lateraly, etc.
This crushes an important driver of demand for furnishings, renovation and upgrades (HD LOW)
It also restricts mobility of labor (disincentive to move out of a below market mortgage).
I have a suggestion for Banana Ben, Little Timmy, Hussein Obama, Pelosi/Reid, et al. LEAVE US THE FUCK ALONE!
Another unintended consequence - The mortgage payment would be lower than justified by the home's price. Therefore, the homeowner would not be able to sell that house as the payments would be higher for the new buyer and the existing mortgage is not assumable. This means a lot of people would be stuck in their homes, unable to sell. That means fewer buyers for homes because people can't sell their existing homes. This would lock up a decent chunk of the market.
Uh, what market? The one that has been less responsive to life-support measures each month?
IAll in all, I think this would be an interesting powerplay between the moneymanagers (not moneybags) and the ruling political elite. The latter ones may even win while firmly entrenching rabble in their underwater houses so that they continue to be a nice doggy and pay that interest and principal (bonus win!), and not thinking about defaulting and saying a big FY to the the managers of USA. Becuase if that were to happen, God forbid, they might actually start seeing things the way they are - that Washington and WallSt couldn't give a flying fuck about the people in general - it's all about influence, usury and P&L long-term projections.
Talk about moral hazard. Where's the bailout for renters who pay bills on time every month? I'm starting to wonder if we are not to close to the point where we see a whole new group of Americans who simply say fuck it, i've had enough, i'm not going to play any more. Where or what is the incentive to do what's right anymore?
'Where or what is the incentive to do what's right anymore?'
Incentive is based on the individuals situation. There may be a small percentage of people the factor in morals when deciding their own financial options, but they are fools.
When a person sees that our system is so corrupt, that removes all incentive for morality.
Now, you will see the same corrupt system pitting JQ public against each other using some kind of morality angle to get people to pay their mortgages until they have no money for food. Total bullshit. I'm not buying it and neither should anyone else.
Credit is a business agreement. Morality has nothing to do with it.
If you want to talk about moral hazard, what about those who were prudent enough to pay their mortgages off? No bailout for them...
The situation has been stepped up from being simply unfair, to "eliminating any future reason to be responsible".
How does one not "play any more"?
Two words... "underground economy". It's huge, and its far more than drugs and construction these days. Merchants and mechanics, doctors and dentists, programmers and porn stars... everybody can play the game.
buy gold . default on paper.
Not hard to believe, the Dems are going to be evicerated in Nov. They have nothing to lose and want to spend their twilight years getting free drinks from 4%'ers
Oh yes, fair? Who thinks any of these folks ever operated on any ethical or moral level outside of utilitarianism measured by their piggy bank.
If the Rethuglicans had any brains, policies and candidates to put out there I'd agree with you. Trouble is, they're as vapid as the Demoncrats.
TY BK. Your essays are always refreshing with a certain sincere vibe about them. You don't necessary write to get attention but to tell the story the way you see it, ~ very much appreciated.
Some of us are curious, how did that story with the unemployed mother with masters and little hopes turned out to be?
Bruce, whats the latest on the SSTF ? have not seen any ZH updates. am sure the bleeding is ongoing.