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Boyce, Hubbard & Mayer | Streamlined Refinancings for up to 30 Million Borrowers
Below is the intro for an important paper by Alan Boyce, Glenn Hubbard, and Chris Mayer, which lays out the finances of the mortgage market in great detail and argues for refinancing of all GSE-covered loans. For home owners, this proposal offers hope to obtain the refinance which is their lawful option but is being denied by the large bank/GSE mortgage cartel.
For investors in RMBS, this proposal is a disaster, a massive pre-payment on vintage RMBS and the loss of tens of billions in net interest margin for the financial system. This paper hopes to shift $70 billion per year from bond investors to consumers and thereby help the economy. The US banking system made $28 billion last quarter. Got your attention now?
-- Chris
Streamlined Refinancings for up to 30 Million Borrowers
By Alan Boyce, Glenn Hubbard, and Chris Mayer
Executive Summary
Frictions in the mortgage market have restricted the ability of tens of millions of borrowers from refinancing their mortgages, hampering monetary policy, slowing the economic recovery, and leading to excessive numbers of foreclosures. We propose a streamlined refinancing program that may benefit up to 30 million borrowers with government-backed mortgages, leading to possible savings of $70 billion per year in lower mortgage payments. Below we describe the current barriers to refinancings, how our plan would overcome these barriers, and why this plan is in the interest of taxpayers, the GSEs, and other mortgage service providers. We also discuss possible critiques and implementation issues and how such issues can be addressed.
1) The problem
a) As of June 2011, more than 75% of GSE3 borrowers with a 30-year fixed-rate mortgage (FRM) have a rate of 5% or more, despite the fact that market-determined mortgage rates have been at or below 5.0% for nearly every month in the past two years and are currently around 4.25%.4 Under normal credit conditions we might have expected three times this many eligible mortgages to have been prepaid, as happened during the last refinancing wave from 2002 to 2003.5 This suggests tens of millions of borrowers have not taken advantage of a seemingly attractive refinancing proposition.
b) We believe that inefficiencies in the origination and servicing process, combined with GSE surcharges (so-called loan level pricing adjustments and adverse market delivery charges), falling home values, and conservative appraisals have made refinancing nearly impossible for most Americans.
c) In addition to blunting refinancing, these mortgage-market frictions are slowing the economic recovery by limiting the benefits of low interest rates for household spending. Unable to refinance their mortgages the way corporations have been able to refinance their debt, consumers are left with weak balance sheets and mortgage payments often above of the cost of renting, contributing to excessive delinquencies and foreclosures. These constraints on refinancing have a disproportionate impact on middle-class borrowers with origination balances under $200,000 and poorer credit and whose employment opportunities have been hit especially hard by the recession.
2) The Offer
a) Every homeowner with a GSE mortgage can refinance his or her mortgage with a new mortgage at a current fixed rate of 4% or less, with the rate subject to change up or down with the price of Agency pass-through Mortgage-Backed Securities (MBS). For borrowers with an FHA or VA mortgage, rates would be higher, but these borrowers should be included in any large-scale refinancing program.
b) The homeowner must be current on his or her mortgage or become so for at least three months.
c) NO other qualification or application is required, other than intention to accept the new rate (that is, no appraisal, no income verification, no tax returns, etc.).
Read the rest of the paper at link below:
http://absalonproject.com/wp-content/uploads/2011/09/BHM-V11-final.pdf
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Investors in agency MBS pools understand they have prepayment risk. That "short option" position is the reason why yields on MBS are higher than non callable treasuries. They also need higher yields to compensate investors from policy risk (ie: underwrting standards get tighter or looser). FYI - not a lawyer - that was a low blow!
You clearly didn't even read the post. You don't need to be current. You need to become current. So someone who has lived mortgage free and pocketed two years worth of mortgage payments can catch up for three months and fuck over the pension funds and everyone else who owns these.
This plan needs to be stopped at all costs. I've had enough of the tricks and games to keep housing prices high and keep deadbeats in homes they could never afford. We need housing prices to go DOWN not up so the struggling younger generation can afford a home.
you are an idiot. If the person has been delinquent the loan has already been bought out of the MBS pool and is sitting in Fn or Fr portfolio. The investor already received par. As for all you idiots who think it is a bank bailout, think again. Who do you think owns over 1 trillion of these premium priced MBS along with all teh MSR's whose value will get destroyed. The reason why this has not happened sooner was to PROTECT the banks. You anti bank types are too stupid to realize that this plan actually helps people at the expense of banks -
Becoming 'current' for 3 months after not paying for two years would be a very interesting trick for most borrowers.
If they actually 'pocketed' the mortgage payments I sure hope they can find the pants they left it. ;)
This could very well happen.
Is it really worth it to me though to reup a badly underwater mortgage, in exchange for still significant refinancing cost? I would be further ahead making a one time excess pricipal payment with the equivalent mortgage refi costs..
The morgage insurance issue was not fully addressed, maybe i missed it. Does a person with no insurance now have to purchase it because their LTV ratio has dropped to the point it would be required?
Principal forgiveness would be the better and more stabil path and have more participants.
Bout time. All for it. Been advocating this for two years now.
Just ... brilliant.
Not.
All this does is try to avoid the market reaching the proper pricing, which is way below where it is right now. The bubble needs to be deflated considerably more before the market for housing actually gives us real prices: until then, it's like throwing money at a boulder rolling down the hill right down your throat. Ain't gonna work, no way no how.
I feel sorry for everyone who bought in the bubble. They're screwed. Trying to refinance them when the mortgage system is broken just postpones the inevitable: the market has to correct to the point where housing is affordable again. The dream of buying a house so that you had a nice retirement nest egg due to appreciation is dead, dead, dead: when you factor in what you paid in interest to the bank (even after the subsidy of being able to take that off your taxes) over 20 or, even worse, 30 years, housing has become an enormous trap.
Now it's the question of being able to work your way out of the trap, gnowing off your leg or waiting for the trapper to show up so that you can try to kill him. I'll leave it up to the reader to explore those scenarios..
And consider item C above:
c) NO other qualification or application is required, other than intention to accept the new rate (that is, no appraisal, no income verification, no tax returns, etc.).
How is this different from NINJA? This is more of the same that got us where we are today. It's a sign of insanity to keep on doing the same thing and think it's gonna come out different this time...
We are talking about ONLY agency MBS. govt already has the risk. Program would actually reduce risk to taxpayers.
I have a non-GSE loan. I am not rich. I pay on time. I get screwed again. This plan is a pile shit 10 miles high. Bankruptcy is there for a reason. Underwater home-owners should deal with this on their own. TBTF banks should go bankrupt. Why I am bailing so many people out for the umpteenth time. ARRGGGG!
That is a drawback. Unfortunately for you the only way for the plan NOT to add risk to the taxpayer is to include only GSE loans. I am a firm believer that strategic default is a very good option for deeply underwater borrowers. But one thing has nothing to do with another. Borrowers with agency loans benefitting at expense of bondholders is better than nothing.
Hey fucknut, "the govenment" is "the taxpayer", so even more risk to the taxpayer. The only way the taxpayer would not be at risk is if the banks lost their capital and usury when a loan they issued failed. If the government is backstopping banks, the banks should be allowed to FAIL and the bank's assets should be immediately sold with all profit going back to the government and taxpayer. Put a few more bankers in the unemployment line and then you might get banks doing their due diligence again. Moreover banks should only be BANKS! No more proprietary trading desks etc.
Hey f**knut? What is that about? government guarantees timely payment of principal and interest of agency MBS. They charge a guarantee fee that gets passed onto the borrower that is embedded in the rate. Holders of agency MBS have no credit risk. All the risk is owned by the taxpayer/govt . Refi exisitng balances into lower market rates combined with a higher guarantee fee increases cah flow to agencies (govt/taxpayers) - refi's hurt premium MBS holders and owners of MSR (mortgage servicing rights ie banks). You are ill informed. Plan would actually not be beneifical to banks - This plan really is a wealth transfer from holders of current above market rate MBS (banks, gse and hedge funds) to the homeowner (who gets lower rate) and the govt/taxpayer (where the credit risk of the EXISITING guarantees goes down). You are too stupid to realize that this acutally may hurt equity holders of banks, REITs and hedge funds. Learn something.
How, under this proposal, do the title problems get solved? Or does each borrower grant a waiver to the banks? Or is there to be a new taxpayer funded title insurance company to backstop all titles?
The only way to clear the title issues is to create a turbo docket of quiet title actions... You don't think your title is clear, file a complaint... sent notice to the original lienholder of record, every other purported holder you know about, and issue a warning order for the rest... chain of assignment comes in and ponies up the documents... make a judgment accordingly.
Waiver won't fix it (homeowner can't grant a waiver for a predecessor assignee of the present purported holder, should said predecessor decide to exercise its rights as the real holder). Federal title insurance company won't fix it (the fed.gov would be required to go after banks of all sorts when any claim is paid out... this would err be difficult... aside from the fact that the title issues aren't cleared, only additional remedies available for adversely impacted parties).
...or have putbacks. This would reverse the chain of credit (mortgage instrument/deed of trust) back to the originator and delete the transfers, if any, in the MERS swamp. If the originator no longer exists, let the state district court assign a receiver and let the borrowers pay into an account under the management of the receiver. Let the receiver deal with modifications or foreclosures under the supervision of the court. We have laws in this country and in our states. The states are the sovereigns from which title springs. Man up and be willing to work through the process.
Or don't we have enough lawyers? (sarc)
We actually probably don't have enough lawyers to deal with the issue at a single point in time... bottleneck if you will. But, generally speaking, if we have enough lawyers to make the mess, we have enough lawyers to clean it up ;)
Presumably, the putbacks would occur through the quiet title action (although skipping some steps)... if they were to happen independently, then it may be a piecemeal approach... where the scandinavian municipalities get angry and seek putbacks on TBTF, et al... and then the buck just stops... I presume they would want to push the mess back up the chain, but who knows. For whatever reason, they may not be able to, but it's possible that the real holder would remain on up the chain. Given rescission is an equitable remedy, I'm really not sure how far that is going to go amongst a den of vipers... I'd think unclean hands would bar many of them from putting anything back.
It may be possible for the banks to do a declaratory action... naming the entire chain of assignment (even though it is unknown) and making an agreement between themselves as to how to divide the spoils and who the real holder is... I would think a debtor would be precluded from arguing against the findings of the court in this regard (challenging the standing of the "real" holder) during a foreclosure action. But this would require some type of positive equity in the home/somthing to go after... otherwise, they won't get in any rush to take a loss...
Makes me wonder what all the claims of industry fraud are about? Oh well, let's just make them all go away.
Sounds good on the surface. Wonder what the unintended consequences will be.
Frankly, I think it won't make even one tiny fuck worth of difference.
The horses are so far out the barn door at this point they are over the horizon and breeding in the wilderness.
The government already has the credit risk and the homeowner's option to refinance (which he paid a rate of 50 - 75 bp extra for at time he took out the mortgage and now cant exercise that option due to a comination of home proce decline, stricter underwriting along with increased fees) has been huge weatlth transfer to the holders of agency MBS WHO HAVE NO CREDIT RISK. For many reasons they need to improve programs to increase refi but borrowers should be current for at least 12 MONTHS and blanket refi is too disruptive to system. Plus they need to work out REP and WArranty issues. Otherwise on the right track. The NIM argument against is bogus but that is for another discussion.
"The government already has the credit risk."
That may be true, but it surely is reversible. Fannie/Freddie paper was NOT guaranteed by the federal government - agencies yes - federal government no. The decision on the part of the government to make the implicit guarantee explicit, has no legal base IMO. What "valuable consideration" was exhanged between the paper holders and the government for the implicit being made explicit? None. Ergo this is not a binding deal.
I was on the phone to my Congressman Thursday. Told him to repudiate the FNE/FRE paper and/or make a tender offer at 50% of face. That is about what you deserve if you were stupid enough to finace the credit bubble between '02-'10. I didn't buy the junk. Why should I as a taxpayer pay.
If the governmet wants to do this, it should calculate the net present value of this "gift" to the homeowners and treat it as income to be taxed. Why should I pay? Much is made of the future "moral hazzard." What about the current gross immorality - you are making me pay today for somebody else's foolishness.
This will stimulate the economy!?!?! Wealth was certainly not created by this decade long house flipping and home ATM fantasy. The banks' and/or FNE/FRE paper holders' revenue streams will be reduced, as will the home owners' cash expense (net cash flow increase to the homeowner). Neither of them knew how to invest it wisely six years ago. Why would they do so now? Homeonwer is scared and will pay down debt. Banks aren't lending now and will lend less with reduced cash flows. This is just a different form of food stamps - but for shrinking middle class folks - and will be financed by money printing. The current low rates are already from money printing. And grandma and grandpa are now getting .1% on fixed where they used to get at least 4%. And when rates will go up - as they must - house prices will crash again.
The solution is to throw the banks, FNE/FRE paper holders, and homeowners in a room and not let them come out to eat or pee until they have arrved a a settlement w/o government intervention. The banks should not be allowed to take an expense against any principal writedown, and the homeowner should sure as s*&t be required to pay tax on the writedown as an income item.
This idea is idotic in the extreme. Worse it is grossly immoral - remember morality - and screws the virtuous. But virtue and prudence and such barbaric relic notions.
I agree 100%. The difference should be treated as taxable and the loans become recourse.
Home prices need to come down. As a young person, I'm tired of getting fucked over to reward the irresponsible. Houses are still too expensive and need to fall much further so the younger generation can afford a home.
Stop rewarding deadbeats. The people who bough the homes knew the interest rate would be X%. They also new they wouldn't be able to refinance if they are underwater. This is all basic finance. Tough shit to them. Default on the loan, home prices come down, rent for a while, then buy a home when the prices fall to a level you can afford.
You are buying into a plethora of consumer-driven hype. You have a very rudimentary understanding of what the article proposes. Did you read the actual long version? I guess a better question would be, did you understand any of either version? You have preconceived notions of what the article says and you're basing your comments on that alone. You really are coming off as quite naive.
http://absalonproject.com/wp-content/uploads/2011/09/BHM-V11-final.pdf
The reality is that if responsible homeowners can refi into current lower MARKET RATES, you me and the rest of the taxpayers are better off. Period. 92% of these loans are current. This plan actually INCREASES the guarantee fee on the loans so the revenue streem to the govt GOES UP. It lowers the interest rate burden on existing risk making the servicing of the loans more affordable thereby reducing risk to taxpayers. The current reality REWARDS agency MBS holders (have u seen the returns of agency MBS hendge funds past 2 yrs?) at the expense of the government. THis plan levels the playing field. The guarantee is still implcit for GSE - only explicit for GNMA. THis plan is a small step in the right directon to help stabalize the economy - only holders of ABOVE MARKET rate mbs will get hurt. Remember they get the benefit of the inability of people to refi without ANY credit risk.
>>>homeowners can refi into current lower MARKET RATES,<<<
One point I was trying to make is that there is no CURRENT MARKET rate. No price discovery. "Market rates" today are a fictional construct of the Fed's money printing. - both direct pruchases of MBS (aka QEI) and falsely low Treasury rates (QEII).
Chris Whalen - leading poster on this article - did a calculation a year ago that the ZIRP transferred some $1 trillion to the banks on the artificially steep yield curve from the senior citizens and other fixed income folks. This is simply an advanced transfer of bondholder income to homeowners.
Artificially low rates means artificailly high asset prices. When those rates soar, house values woill plunge. That means the loan collateral will plunge, and the loan quality drop. No risk reduction there. Homeowners further underwater - albeit better able to stay in there increasingly losing investment. Said investment has also become less liquid in the soon to be high interest rate environment. Rememer that liquidity is a big piece of the bond price/rate. I will grant you that the prepayment risk will drop to zero when rates rise - a plus for the bondholders.
There is no free lunch out there. Always hidden consequences.
"This is simply an advanced transfer of bondholder income to homeowners."
So what? It's about time. This would be the first time the oligarchs have suffered that direction of wealth transfer. For the whole rest of this debacle, the flow has been from the homeowners/taxpayers to the banks, etc. Somehow I think this refi is but a tiny portion of the riches already sucked out of system by these pricks. Tough shit if they don't like it. Funny how a rather minimal bailout of Joe 6P raises such ire, and the mega-trillions that went the other way were hardly protested at all.
And yes, it may have the collateral effect of helping to support residential real estate prices. Last I checked the help is desperately needed. All of these "collateral conseqences" complained of also apply to ZIRP, only on a vastly larger scale. And that is firmly entrenched as policy.
The middle class needs rescuing. Let the class warfare begin, because the only people opposed to it are the "haves." Fuck 'em.
You think supporting real estate prices is something governments should be involved in? I'm not so sure. As little faith as I have in free markets (probably because I have never seen them truly work), I have less in the federal government (because I have seen it work - to the detriment of the people).
My read of the 100 year Case-Shiller home index (available at http://www.ritholtz.com/blog/wp-content/uploads/2011/04/2011-Case-SHille...) is that housing is still 40% over-valued compared to the 100 year average. Given that wages for the bottom 90% of the population have been flat for almost 40 years, there is absolutely no way that the ramp-up in housing prices since the late '90s was legitimate in any way and indeed was only made possible through fraudulent lending practices and ultra-liberal credit terms by the banks, creating a speculative bubble. In a word, current housing prices are delusional. I sympathize with wanting to help-out J6P rather than the banks, but in the long-run it won't make any difference unless mortgage principal is reduced and home values take a hit to bring costs in-line with incomes. We have a bubble in home values; the interest rate is a side-issue, meant to distract us from the fact that housing is still way too expensive. At this point, the psychology of prior investment just delays the inevitable day of reckoning, as TPTB use gimmick after gimmick in an attempt to keep an artificial floor under housing values.
A few months back, "Prof. Shiller told Reuters that he thinks another 25% drop in US home prices across the board is very possible, if not likely. Add up the 33% decline to date and a 25% fall from here and you're about at 50%. That would mean a loss in American "household wealth" of some $11 trillion. Here's saying that the US economy can't take that sort of plunge and hope to live to see another day in anywhere near its present or recent shape." This was reported at http://theautomaticearth.blogspot.com/2011/06/june-13-2011-derivatives-p....
Exactly. Even the Neo-Classicals will tell you that the terrible imbalances and dirth in our Economy are due to the fact we unilaterally bailed the creditholders. In their insane Bubble Cycles System, the equalizer is that the capital owners get their asses handed to them in a pullback.
We meddled in the Extreme, and Markets have not been the same since, because losses are hidden or were indiretly/directly steeped on just about everybody who was not a creditholder. or like-sided derivative holder.
If one wants to make it a class issue, there was a redistribution of 20+% wealth to the top, who are capital holders.
They are welcome to it, but gov't guarantees and Fed excess has them with assets which are not properly priced. Meanwhile those gawddamned Banks, can't/won't afford to provide access to the part of the "recovery" which should have reached the Demand side of the ubiquitous equation.
The situation has become so complicated by artifice, we have no One-Step to unwind this sucker.. We are going to have to work this one-bite at a time. This is a great start, and was actually suggested 2 weeks ago.
This is destructive idiocy to have peope servicing the principle so consistently above the Market. The people who are finding ways to pay those mortgages have improvised and overcome in odd ways which don't fit the old creditworthiness definitions.
But they have.
If they have kept up, they get a a Re-fi.
There is no principal adjustment.
We'll get to that in Round 2 of the many it will take.
Rates may be artificially low but if some third party wants to buy agency MBS at current prices that is a market rate. You may be right to disagree with the level of the rate but billions and billions of agency MBS trade there everyday and if foreign central banks, mm, hedge funds want to buy em - so be it.
"For investors in RMBS, this proposal is a disaster, a massive pre-payment on vintage RMBS and the loss of tens of billions in net interest margin for the financial system."
Tough shit as to both groups. More whining on behalf of the oligarchs. I have a slight degree of sympathy for the RMBS investors, but if you invested in them in the last 2 years, you haven't been paying attention to the news of all of the problems these toxic securities can suffer from, but on the other and, for those who did invest in RMBS, many bought with a discount far less than par, and that takes me back to my first reaction. Tough shit.
You can't expect anyone to invest in the US market if you are going to change the rules whenever you feel like it.
Not changing rules.
Are you retarded? You absolutely are changing the rules. The pensions funds, insurance companies, and others are getting fucked over because you are allowing people to refinance now when it was not permissable under the original conditions.
I've had enough of the bailouts to deadbeats. If you bought a home you can't afford, tough shit and walk away. It is not someone else's job to make up for your stupid financial decisions. We are destroying the very idea of "investment" and "financial decisions"! It's fucking lunacy and it destroying whatever grim future we may have had. Enough.
corn for brains - listen to ned. The original conditions did not have llpa's and a whole host of new impediments that create friction for refi. The borower paid extra 50-75 basis points on the original loan for the option to refi if rates fell. If anything the rules changed on the borrowers. Dont start feeling sorry for investors in callable assets when they are called away. I assure you that they know the risks. All this program does is allow people TO REFI under the original conditions. How would you feel about the reality of the fact that the banks and GSEs own a large proportion of the agency MBS that have benefitted from the collusion of the banks and GSE's to prevent people from refi. It is the truth.
A brain-addled monkey could have refinanced under the original conditions.
Seems like a big wet-vac vacuum cleaner. Along with the obvious pools of water in the middle of the floor that are bothersome, it will suck all the little wet spots that are on the edge and would have evaporated on their own into the system.
The FICO system is a joke. This is perefctly logical. Too many people locked out by standards and overlays that has provena poor measuring stick.