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And all those new mortgages would be full recourse loans with tiny print saying you couldnt sue over faulty paperwork.
S&P500 big picture remains bearish and this will ALWAYS exert the most influence. The only thing GUARANTEED is that the bearish medium/long term cycle will have the upper hand.
FX medium to long term outlook continues: Euro bearish and USD bullish.
As mentioned many times - bring on the OVERDUE USD rally.
IMPORTANT CHART HERE.
"This is only a re-pricing. Not a reduction of total debt."
Not just a repricing, but a huge income hit to savers as well. ZIRP on steroids. The whole scheme is POWERFULLY deflationary, as the Fed's swapping of 5% and 6% paper for 4% mortgages simply boosts the losses at FNM and FRE that need to be funded by taxpayers. The losses are REAL, no matter what sort of shell game they play with the Fed regarding swaps and rate guarantees. The simple truth is that they're eroding the earning power of savers.
"Who would be AGAINST this plan? No one that I can think of."
What?! Come on, Bruce. It's obvious who the losers are here: the people who prudently put money away in a mortgage bond fund hoping to earn 5% or 6% in a world of ZIRP. Simply more of the same. Obama et al continue to believe that making losers out of winners somehow benefits the nation. All they're effectively doing is continuing to fund the incomes of non-productive people (via Treasury purchases) with the income streams that previously have gone to savers. Total crap.
NO ONE CARES ABOUT SAVERS!!!
Most excellent BK and ZH for passing your insight on to the rest of us! Great article.
I'm still skeptical this is politically possible.
If I understand right, we are talking about a mass refi of GSE-securitized mortgages. How can that be done? Congress can't rewrite thousands of contracts into lower rates, that would get thrown out in Supreme Court. Congress can't require private banks to offer refis to particular people or at particular rates, that too would get thrown out. So how?
Frankly this sounds like a plan going nowhere. Maybe something will come out but if so it will have less impact than the loan-mod program. There are various reasons why people don't refi - early payment penalty clauses, bad credit, lack of stable documentable income, too dumb or lazy to save themselves money. Maybe some of the latter group can be helped, if somebody really thinks it's such a big public interest.
Brilliant work. In a world of regurgitated puff pieces it's refreshing to have the benefit of some actual journalism.
Not to put too fine a point on this but...what does this do to the S&P? Is this the next panacea that makes all right with the world and sends the market soaring?
Disclosure - I'm net short S&P and long gold
It's a sham, a bank recapitalization plan. Refinanced mortgages usually become recourse loans regardless of state laws. Banks will get 100% for the loan, freeing up their balance sheets, homeowners will now be on the hook for the full price owed on their mortgage and can't just walk away like before. The value of a non-recourse loan is huge and far exceeds a reduction in APR in my opinion. A bank bailout while leaving the taxpayer on the hook and the homeowner a permanent debt slave.
Here's my advice: RUN, DON'T WALK, AWAY FROM YOUR UNDERWATER, OVERPICED MORTGAGED HOME BEFORE IT'S TOO LATE!
Bruce - you are on f*#king fire, another great post...you are the master of reading the tea leaves.
Doesn't this plan mean We Are All Australians Now. They are obsessed with rates because all their mortgages are adjustable rates. So Australia can be very responsive to monetary policy....Ben is so jealous, so this is the next best thing.
I've been thinking for some time the only regular people who have gotten a backdoor bailout are the strategic defaulters that are squatting and fight foreclosure easily because of title/MERs/MBS mess, or not even getting foreclosed on due to bank wanting to show reserves. Big banks have gotten other sources of income via FED to make up for not paying mortgages, so they gladly share the wealth by not moving on squatters so they can pretend they have reserves. That is if their money is involved, because if they are just servicing, they love to foreclose even when it makes no business sense for the actual investors.
It seems the only time regular folks get a piece of monetary largesse is when it happens to trickle down from power folks efforts to save big, connected boys. At least this trickle down rate cut is slightly more fair than the squatter, back-door bailout...rewarding those who have diligently paid even as the equity disappeared down a rabbit hole. Of course, everyone would be better off with principal write down...but that would wipe out derivatives and bank bondholders, so will not happen unless complete collapse.
So, what happens to the MERS title situation, new good title gets brought down? A 'get out of jail free' card for the banksters?
Argh, this idea will not work.
First of all, the core problems (in order) are: 1) underwater mortgages, 2) excessive interest service burden. These two factors combine to push mortgagees into default or prevent people from moving (literally), thereby preventing residential liquidity from matching geographic job liquidity.
As Bruce points out, simply twiddling the price of existing debt helps to address #2 but it does NOTHING to address #1, which is by far the dominant factor here. The original NYT article makes the same point:
"American homeowners currently owe some $700 billion more than their homes are worth."
As I said back in 2008, what is needed to address the problem is principal reduction which addresses both #1 and #2 as the interest burden on a smaller principal is reduced. Home sales will pick up rapidly as the market unfreezes, people play their get out of jail free card and move to another city, a rental, or a more desirable home. Payment for the write downs need to be made, as much as possible, by those who profited most from the Ponzi, which means going after the shadow banking system. The shortfall, (which will inevitably be large), would ideally be taxed out of the FIRE sector over years. the logic being that "financialization" of the economy enabled the Ponzi, so de-financialization should pay for Ponzi reversal.
To achieve this requires a legislature with morals, balls, and a desire to do what actually benefits the economy long term instead of benefiting their short term hooker / crack demands. In other words, we're screwed. It will be a cold day in hell before the "financializers" pay for the mess they created. No, instead we'll get all losses being socialized which only make the problem worse as it draws cash out of the real economy to cover losses in the FIRE economy.
So these are the two reasons why the idea being leaked in the NYT will not work:
#1). The plan addresses debt prices only but does nothing about the bigger problem of underwater home prices (excessive principal). Temporary minor relief in interest service will provide a short-term boost to the economy but unemployment will remain high because the structural issues with the economy have not been resolved. Having a loan at 8% or 4% makes no difference when you're unemployed. It also makes no difference when you're deeply underwater and jack of it all. Defaults will continue and this money for QE3 will be wasted.
#2). The plan simply dilutes the shittiness of assets on the Fed's books with shitty water. In other words, while there may be more liquid in the system, there's also more shit. All it does is move even bigger amounts of net shit off the Fed's books and, indirectly but ultimately, onto the Treasury's books. Treasury pays for it all by selling bonds to the Fed and, because a direct sale is prohibited by law, the Primary Dealers take their cut along the way ensuring that Treasury gets stuck with a bigger bill. This will cause further distortions in bond markets and more systemic risk as fixed income must further flee the safety of TSYs in pursuit of much more risky yield (equities up). Inevitably, total Treasury debt will have to be addressed, causing political turmoil, a likely further downgrade (with all the mess that causes), and that the burden for paying for these refi's has now been shifted to the general taxation pool. Increased future draw from general taxation (and believe me it will be general, it will NOT target the FIRE sector which deserves it), will fly as "austerity measures" and will hammer the real economy that's trying to recover. Said another way, any short term benefit provided by refis will be offset by the long term cost of future taxation, and the latter will exceed the former due to the middlemen in the deal taking their cut and adding a layer of expense.
In summary, if QE3 goes down this way, all that will happen is that the real economy collapses further, mortgagees sink further underwater (negating any benefit), unemployment rises, meanwhile the financial economy inflates by the equivalent amount. Eventually it breaks and people start looting and shooting.
exactly what I was thinking. A refi at lower rates does nothing to someone who is underwater which is the case with most defaults I would think. Sure it helps free up cash for people who are stuck at higher rates and are not able to refinance for one reason or other but I would think those happen to be a small percentage. Is my understanding wrong?
Thanks to everyone for all these great comments.
A central question from this is, "What happens to the MERS/Title issues?" This is a critical issue. To get the banks to go along with this they will offer/require to "clean up" the title issues.
No one will be forced to participate if this should come about. Either one gets a new cheap mortgage or one has to fight on the title issue. You can't have it both ways. Read the fine print if a deal is forthcoming.
On the issue of recourse. There are states where this is allowed, others where it is not. Any Refi would HAVE to conform to the laws of the state where the property is located. This means that the recourse provisions don't change. If you had it before, you still will have it. If you had no recourse to begin with, you end up the same. I can't see a way around the state laws on this.
Yeah, this will be interesting.
I mean, it seems a complete no-brainer that banks will love this because it gives them a chance to get mortgagees to sign a fresh set of docs, making the existing legal issues magically disappear.
But where it gets interesting is what happens when a mortgagee has a clue and realizes that in the current situation they hold their bank by the balls and simply refuse to sign up. I have a pretty strong suspicion that there are going to be legal moves afoot in DC to FORCE mortgagees to re-sign. It's the lazy way out for banks, a lot cheaper to lobby DC than try to backtrace the (lack of) a paper trail caused by MERS.
Excellent analysis. And yet one more example of how either 1) the Fed thinks it has invented alchemy or 2) the Fed is getting increasingly desperate.
Total risk is never reduced. It is transfered. Perhaps transfered to someone who can better bear the risk (the genesis of securitization), but it still is there.
Further, it is one more example of how political risk is being increasingly introduced into the markets. If I had bought an MBS at a premium given a thorough analysis of prepayments and defaults, I would be furious at being called.
How can anyone gain confidence in investing when TPTB change the rules on a whim? Even if an investment may make economic sense, that could quickly be overridden by some new political edict. We may have to resurrect the old art of Kremlinology in a new DC incarnation.
Painful as it may be, that is why I have been predominantly in cash and PM for the past 3 years.
Bruce, the elephant in the room is how they will qualify these borrowers, with Fannie and Freddie overlays that add fees because of lower fico scores, high Loan to values etc, by the time they add these in there, the rate will be at a level where there is no benefit to the borrower.
Fannie and Freddie already have a similar program called "DU refi plus" that refinances up to 125%, it's a bloody disaster as only a few can qualify, and by the time they do add in all the Fannie risk based pricing fees for fico scores and Loan to values etc, the eventual rate even in todays market is close to 5%. Also, rates may very easily rise from here too, because when QE2 came last November, bonds sold off and rates jumped from 4% to 5% in 30 days, so there goes your 4% refi program up in smoke.
The Fed is trying to juggle too many balls right now, and if QE3 does comes along I think it will kill this program because rates will rise, even before this program got out of the gates. It is all a front by Obama to "buy" some votes and he will probably announce this program in his speech next week, but when we see the devil in the details, this program, along with all other Obama housing programs will be a fucking disaster!
Also, if the Fannie borrowers get a letter in the mail that says, sign here and get 4%, this will without a doubt lead to more defaults from folks who cannot qualify for this program. It will backfire because any idea ever created by the govt has backfired and it will lead to more moral hazard among other people who see their neighbor getting 4% for nothing, while they actually did nothing wrong but unfortunately their loan is not owned by Fannie, but by a community bank or some other servicer. Buying votes is the synopsis of anything these days coming from Obama, this will fail and fail miserably.
Excellent commentary by the way.
So its a really clever way to flood the system with money. So who loses and when? When is that inflation monster suposedly going to wake the f*k up?
Thanks for a great article. Bookmarked.
(PS. No, I don't think this solution is going to work. It's just kicking the can down the road and hoping 10M people with a bit of disposable income will somehow kickstart the economy instead of defaulting on their loans and keeping up with the rising cost of living. Might be fun to watch the fanfare and bullshit when they roll it out though).
I have to admit there is some bitter logic to such a scheme. But, please dear God don’t allow it to include any cash out refinancing.
And someone keep an eye on Angelo Mozilo. If he starts setting up shop to arrange these deals, you know we got trouble brewing.
Actually, if you look at the alternative, massive defaults, endless foreclosures, real estate collapse deepening, if this results in homeowners being able to stay in their home and have extra dollars to throw at consumables it will be a win-win-win.
But this has to be a "we take on all comers" deal, not just GSE mortgages.
BTW Union Bank does something similiar for Los Angeles County. They will refinance at 95% of appraised value at a set rate which doesnt fluctate daily like traditional rates. There are income restrictions so that anyone making over $75,000 / yr doesn't qualify. 30 yr fixed 4.125% rate and no MOrtgage Insurance.
I know from having so many connections in the industry and former employees of mine working at US Bank, that this program is blowing up. The created a new Los Angeles team of Loan Officers, Processors, Underwriters etc and 3 months from now they say they will need to expand.
So this is plausible .
BTW I am currebtly guiding my parents to get one to get out of their 10yr Ineterest ONly which is at 5.75% and has 3 more years before it turns into a fixed 20 tear amortized principal and interest payment.
Let me understand this correctly.If i as a homeowner agree to this deal,I will save a couple of % on my mortgage,but it will be basically a recourse loan so i will never be able to walk.SO if the original loan is $500,000 and the value of the house is $350,000 ,I am saving $10,000/year ,but i have locked in a loss of $150,000 if the house stays the same in price.For those homeowners who are going to stay it is a good deal.For rational people it is just PLAIN STUPID, especially in non-recourse states. Will this also be extended to second homes also.
Second I want to undersatnd the mechanics of thsi proposal.If this is a bank bailout then the banks must still own the loan.So to use the example above .the bank will be made whole on their $500,000 loan while the agencies will now own the loan.So the agencies have a loan which is immediately underwater by 150,000,but they have basically a recourse loan.
Third what makes you think that seconds have been written off.If Wells had done their equity would be vastly below zero.
I must have missed something. Where does it say these are recourse loans?
There has been some talk that the homeowner can not walk away from the the new loan, the equivalent of recourse..And if it is nonrecourse then the agencies have now assumed an underwater loan at a lower interest rate,this making it highly probably that the agencies will be in greater trouble in the future than they are now.
Bruce Krasting: "Who would be AGAINST this plan?"
Me for one (I think). As you say above, that would have to hinge on whether a principal writedown is involved, otherwise the interest savings just don't seem to justify giving up the non-recourse nature of the original mortgage. Seems to work out for the pols, banks, MERS, mortgage insurers, MBS holders, Fed, brokers and homeowners with too much house for their income. I call a premptive shennanigans.
Who are giving the homeowners the new 4% loans?
F/F. The old loans become new loans. With a 4% cost.
Excellent Article Bruce. I think refinancing at a lower rate will help those people that are qualified and can pay. I think this will help a small part of the problem. But other options are on the table that spells another boondoggle. First they are going to allow or are thinking about allowing people already in foreclosure to refinance at the lower rate. I do not see the point of this one. Actually if you can afford a larger payment you can re-finance for 2% if qualified for a 10 year currently.
I see this as a way to get around all of this robo signing and the financial institutions once again getting a clear title so they can indeed foreclose on the property without the states stepping into the fray and actually helping those that got scammed with these screwed up mortgages. Correct me if I am wrong here. The toxic assets are already paid for with the exception of those that were not foreclosed on at the ending of QE2. This is a great scam as now the house will be paid for twice. The banks will now have clear title and the states attorney generals will no longer have a say in the foreclosure process.
I do not think people are going to want to re-finance if their porperty values are in the tank. Most would prefer to walk away. Watch this one close as they may come out with you can re-finance at the new peoperty values. Otherwise this is just another failure.
This is exactly what I was thinking as I read Bruce's article -- the banks want borrowers to sign new loans to paper over the title problems.
Here's a letter you should write, get it notarized and sending registered mail to your home loan servicing agent...
Qualified Written Request under the Mortgage Servicing Act of RESPA and Request for Information Related to the Owner and Holder of Note under the Truth in Lending ActIn the Matter of:JOHN Q. TAXPAYERMain StreetCity, State 00001
SSN: xxx-xx-xxxxFile Date: Our File No: Your Account No: xxxxxxxxxx
Dear Sir or Madam:
Please treat this letter as a “qualified written request” under the Federal Servicer Act, which is a part of the Real Estate Settlement Procedures Act, 12 U.S.C. 2605(e). This request is made on behalf of my Clients, the above-named debtors. Specifically, I am requesting the following information:1. A complete and original life of loan transaction history prepared by the Servicer from its own records using its own system and default servicing personnel.2. A copy of your Key Loan Transaction history, bankruptcy work form, or XLS spreadsheet of all accounts associated with this mortgage loan (this would include both recoverable and non-recoverable and restricted and non-restricted accounts).3. The Transaction Codes.4. The Code definitions in plain English.5. Please attach a copy of the MERS Milestone Reports and MIN Reports.6. Please identify the full name, address and telephone number of the current holder of the original mortgage note including the name, address and phone number of any Trustee under the Trust or other fiduciary. This request is being made pursuant to Section 1641(f)(2) of the Truth In Lending Act, which requires the servicer to identify the holder of the debt.7. Copies of all collection notes, collection records, communication files or any other form of recorded data with respect to any communications between you and the debtor.8. Copies of all written or recorded communications between you and any non-lawyer third parties regarding this mortgage (including but not limited to LPS Desktop communiqués, NewTrak communications, NewInvoice transmittals, Newlmage transmittals, electronic communications by email or otherwise, collection notes, and any other form of written or electronic document related to the servicing of or ownership of this loan).9. All P-309 screen shots of the history all of the accounts (principal, interest, escrow, late charges, legal fees, property inspection fees, broker price opinion fees, statutory expense fees, miscellaneous fees, corporate advance fees, etc.) associated with this loan.10. In accordance with Section 131(f) of the Truth-in-Lending Act, 15 U.S.C. Section 1641(f), please provide me with the full legal name, street and mailing address, and telephone number of the true owner and holder of the promissory Note signed by my clients and secured by the deed of trust in my clients' mortgage loan referenced above.
To the extent that the servicer of this mortgage loan charges the debtor’s mortgage loan account any fees as resulting from the servicer’s response to this letter that were not disclosed to the debtor(s) and approved by debtor in writing, the debtor(s) dispute(s) any such fees and costs and specifically requests that the account be corrected.Sincerely,
Me like. But I need more info on what is going to happen to me/home/loan before I would send such a letter. I'm in 'good standing' ....w/ my POS underwater loan (no fault of my own)....what status/ramifications will I be placed under once sending such a letter? What response is legaly required? What is my recourse if info not released?...etc...
I have not sent such al etter because I'm afraid....afraid of my response if I don't like the answers....
How about just making ALL Mortgages assumable with payment of 10% of the mortgage balance and without lender approval, problem solved. F the banks!
You are the man, but I have one question. If F/F refies all these mbs to 4%, where are they going to get the capital ($1.4t) to pay off the fed and the other holders? This would dramatically change the size of F/F holdings. Forget about interest rate risk, what about the increase in leverage on F/F's balance sheet necessary to assume all those mortgage loans? There is either a huge infusion of capital to F/F or leverage rises dramatically. Where will all that money come from? Please advise.
You're assuming all MBS buyers would just disappear. They won't. These guys have been hit with prepays very heavily for the past two years as rates fell. They just bought more at lower coupons.
The buyers are yield hogs. They will buy what is offered. New MBS will still trade to a premium to treasuries. There will be buyers. Not to worry.
If MBS buyers will gladly purchase these riskier mortgages at 4%, why does the government need to step in? Why can't a bank collect some fees, re-fi the mortgages, and sell them to the yield hogs?
Bruce, thanks for taking the time to contribute. I have gained so much from reading your articles over the past couple years.
There's one more huge benefit, Bruce. These new (refinanced) mortgages erase an old mortgage with a clouded chain of title, and put the original note in the hands of the lending bank, with no MERS involvement.
If push comes to shove, they can foreclose with no "who's got the note?" challenge.
Bruce you are a fucking genius. No shit. Just repeating what I've read make me look like a guru. Thanks.
I've read most of the comments, but still don't quite understand the dynamics. Aren't the existing loans the basis of mountains of securities? Aren't there CDS written on some of those securities? If a large percentage of the loans in a trust are paid off ahead of time, wouldn't the trust be injured as there would be no more interest payments? Wouldn't that trigger some CDSs? Sorry, I truly do not understand the nuts and bolts of securitization but these existing higher interest loans are somebodies bread and butter.
Also, please go into the "worst case scenario" of inflation. That is, if interest rates rose, F/F would exercise those swaps the Fed sold them. How does the Fed finance this? Print? Hello, wouldn't this bleed bucky some more, add to inflation and potentially encourage a death spiral?
Yes, I think this is very possible and may even be smart, but dear God, the risks wouldn't go away, they merely go from F/Fs bondholders to all of us. Brilliant Bruce. Brilliant but scary.
Perfect! I wish I had said it so clearly.
"The risks merely go from F/Fs bondholders to all of us."
Bruce, what's your day job? You don't even read these brainless comments, I know. Waste of time.
Bullshit! I read everyone. Look at the number of response I have here.
I love my readers.
And even if we disagree with you on somethings,
WE <3 U, BK!
...And we love you, bk. Great post, as always. This is good for US$ short term, so PM will drop a bit short term. Consumers will spend a bit, imports will rise a bit...And balance of trade will go -ve a bit more, US$ will then resume its trend unless Euro does not peform...well merry go around, ponzi to the infinity.
Bruce is a plant. But who's plant, baby?
he's a retired hedgie
and generous benefactor who freely shares his wisdom and insights
If this comes to pass it is time to shoot on site all bankers, all financial idiots, and all politicians. All this finanically is akin to moving the chairs around on the Titanic. This is the problem with MMT and modern economists, they do not live in the real world.
Somewhere along the line VALUE has to have meaning or the balance sheets get blowtorched. THIS is "innovative thinking"??? This what used to get you locked up for being crazy or theft and confidence game. However it is standard practice and applied theory in the world of fiance and economics.
A degree in either fiance or economics apparently does not mean you have logic, judgement skills or or critical thinking, and clearly must have a detachment with reality.
If it comes to pass, I'm no longer playing by the rules. This is where I draw the line.
Do a Quiet Title and you could own your home without needing to make another payment. If the paperwork is 'broken' you can file ownership of your home and be done with payments.
DEMAND to see the original wet document on your home loan and ensure that the title ownership process has been filed legally. Many loan owners, as they changed hands, did not follow the law (think MERS scam here) and as such the person who CLAIMS to own your loan may in fact not be the true owner. As such, you should immediately file for a quiet title with your city and get the facts, as you could soon own your home free and clear.
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