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The Fed's Plan - Rumors of News
Go back a week to an article in the NY Times (Link). The guts of this story is that the Administration is working on a plan to Re-Fi residential mortgages on a massive scale.
When I first read this, I ignored it. The scope of the proposal was too large. There was also (IMHO) a fatal flaw. The thinking was that the jumbo ReFi would be made available to only those who had a mortgage that ended up with either Fannie or Freddie. I ask the question, "What about those poor odds and sods who have a mortgage with a community bank?” Do they get nothing while those who owe F/F big bucks get a break? Where is the fairness in that result?
But every day since the NYT story, I have heard the rumblings about some deal being done. It has already impacted MBS spreads. It's back in the news today with an article in the WSJ. (Link) I have to believe that where there is smoke, there is probably some fire.
I went back to the NYT piece. There are some clues. First is that Louise Story wrote the article. She is a fine reporter. Anything that she says has been supported by “real” sources. "Who were these sources?" is a question to ask. Some words from the piece:
Administration officials said on Wednesday that they were weighing a range of proposals.
Read this to mean that people in the Administration deliberately planted this story. This was a “trail balloon” approach. This is very typical for this administration. They leak their intentions in advance. More from the NYT:
But refinancing could have far greater breadth, saving homeowners, by one estimate, $85 billion a year.
The following chart was included in the NYTs article.
The information in the chart and the very precise estimate of “85 billion a year” can only have come from one source. It has to be the FHFA that is doing the talking to the NYT. It had to come from the most senior level. That HAS to mean that it came from the Acting Director, Edward DeMarco.
The NYT functionally confirmed the source of the article as DeMarco with this written quote from him:
“F.H.F.A. remains open to all ideas that provide needed assistance to borrowers” while minimizing the cost to taxpayers, Mr. DeMarco said in a written statement.
Now consider some of the wording in the WSJ article today. Note: This article was written, in part, by Jon Hilsenrath. Jon is well known to be a mouthpiece for the Fed. He gets his thinking directly from Bernanke. Some quotes:
There are several reasons why refinancing has been weak, say Fed officials.
Some Fed officials say that it would be in Fannie and Freddie's financial interest to allow borrowers who are current on their mortgages to refinance at lower rates because it would increase the likelihood that they won't default.
Officials at the Federal Reserve are frustrated that they've pushed interest rates to the lowest levels in decades and yet many borrowers haven't been able to take advantage.
You can take these quotes to the bank. They are from Bernanke. It is Bernanke that is frustrated that his low interest rate policy has not resulted in more ReFi’s. You can also take as a fact that Bernanke wants something done on mortgage relief.
One other fact in the picture. The new IMF head, Christine Lagarde, spoke on the phone to Obama before her speech at Jackson Hole. She must have told the Big O that a program to clear up America’s mortgage mess was her top priority. She made that very clear in her speech the following day.
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Okay. Put these pieces together. What do you have? Assume for the sake of discussion that the President does announce a major new initiative to ReFi F/F mortgages. Assume further that the cost of the millions of ReFi’s would come from existing sources (the $35b of already issued and funded Hope Now Bonds), or better yet, the costs would be crammed down the neck of the banks who are servicing the loans (necessary to get DeMarco to go along). Say, for the sake of discussion, that the targeted mortgages are those who have not yet defaulted, but are desperately in need of a break. That amount would come to about $1.4 Trillion. This is a very big amount. Assume finally that the new mortgage rate would be about 4%. This (if accomplished) would be a very big shot in the arm for the economy as a whole.
Now do a flow of funds for this mega transaction.
I) Homeowners get a new loan at 4% and payoff 100% of the old mortgage.
II) The servicing banks get the proceeds and pay off the old loan.
III) The money is paid to F/F. This money is used to redeem existing mortgage pools of Agency MBS.
IV) Fannie/Freddie have the same asset mix at the end of the day. They still need to finance the new 4% mortgages they are writing.
V) Fannie and Freddie are taking on substantial new risk as they now have a book of 4% mortgages and are much more at risk to rising interest rates.
VI) It takes 90 days for a new mortgage to become a new Agency MBS. During this period F/F warehouse these loans. They finance the warehouse with short-term debt. They take action to reduce their risk by entering into new swap transactions or by buying derivatives to neutralize the market risk.
VII) As the process goes on huge chunks of EXISTING higher coupon MBS are prepaid. Investors in those MBS securities will be forced to re-invest the proceeds.
So who is going to be the biggest recipient of the cash pre-pays? That’s easy to answer. It’s the Federal Reserve. They currently own 1.0 Trillion of Agency MBS. A very substantial portion of the total prepayments of F/F MBS will be paid to the Fed. The Fed’s balance sheet will shrink very rapidly as a result.
The Fed has already established what will happen when principal is prepaid on their holdings of MBS. The have said they will reinvest any proceeds back into new purchases of US Treasury securities. As this chart of the Fed’s holdings show, this has already happened to the tune of $250 billion. The new proposal for the mega ReFi will dramatically reduce the MBS holdings. It will force the Fed back into the market to purchase big amounts of Treasury bonds. This process will take at least a year. But the total amounts could easily exceed $600 billion (QE2 size).
There is a flaw in this logic. On a macro basis, total mortgages loans remain the same. This is only a re-pricing. Not a reduction of total debt. The reality is that the Fed will be buying more treasury bonds, but F/F will have to be selling new bonds to protect themselves against interest rate risk. What will be happening is that the Fed is buying to reduce interest rates while at the same time F/F will be buying protection in the form of swaps, options and new term funding. So the real consequence to the credit markets will be a wash.
There is one solution to this dilemma that achieves the desired outcome. The Fed could easily enter into the swaps/options with F/F to eliminate their basis risk. Think of this as a different version of “Operation Twist”. The Fed wants to reduce long-term interest rates. It does not matter to them if they do it with direct purchase of bonds or if they absorb future interest rate risk by writing derivatives that would neutralize the market impact.
The Fed can’t write $1 trillion of interest rate swaps to the street in order to achieve this objective. There would be far too much counter-party risk for the Fed to do this. But they have no counter party risk with F/F. At the end of the day F/F is the government, so the Fed can say they have no counter-party concerns. The bulk of this would be financed by F/F in short-term markets. The swaps and options with the Fed would alleviate the market risk they would face from the ReFi’s.
Who would be AGAINST this plan? No one that I can think of. DeMarco would be able to say that the plan protects the taxpayers from future losses. Obama would say that he has created a new stimulus of $85 billion a year. Bernanke would love this plan. He would be “Forced” into buying a new big amount of Treasuries. He would have his excuse for QE3 handed to him. That the Fed would be forced to absorb new risk of loss to rising interest rates is of no concern to the Fed. They are in so deep today, another $1 trillion of notional risk would not change the picture. Keep in mind that the Fed is very anxious to pull the next trigger.
Who would be the sources of SUPPORT for a plan like this? Everyone but some Republicans is the answer. DeMarco (FHFA) would get what he wants. Obama would get what he wants (10,000,000 homeowners would love him). The economy WOULD benefit from this as consumers would have new cash in their pockets. Bernanke would get everything he wants (a new QE), and would have the political cover for his efforts.
The only voice of dissent will come from Republicans in the House. But it is very likely that this could all happen without a vote. From the NYT piece:
The idea is appealing because it would not necessarily require Congressional action.
There are too many pieces of this pie to ignore. This is a solution to problems that are both political and economic. I see no significant opposition. Republicans will scream “foul”, but who cares. This can happen over their objections.
I'm looking for something along these lines to be announced soon. It will come in the President’s upcoming speech. None other than Ben Bernanke will be the biggest supporter. That makes it a very feasible outcome.
Will this work? I’m not convinced. I think this is the ultimate "kick the can down the road". But that is the only strategy that is in place today. Delay the inevitable; win the next election. That is the only thing that matters in D.C.
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Rumors, rumors and more rumors
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Hmmm...not familiar w/ the 'quiet title'...I'll do some googling...(anybody have luck w/ this approach?)...but how quiet is it? I don't want to start shit...until I'm ready to start shit.
for the junkers (assuming you don't work for a bank or servicer, or in res. RE):
other than the potentially questionable ethics in filing a quiet title complaint, is there another reason for the junk?
with all the class action lawyers operating out of legislative hell hole jurisdictions out there, i'm somewhat surprised there has not been more done to fight the banks' title problems.
dupe
Bruce, where does the $1.4T come from again?
"...the costs would be crammed down the neck of the banks who are servicing the loans"
How? Do these (insolvent) banks have a spare $1.4T lying around then?!?
Excellent article ... but I don't get it!
Narrow this down to make it understandable.
The total of mortgages held by F/F is $1T. All of them are re-set in one day from 5.5% (average) to 4%. Now you go to bed.
The next morning how many mortgages are there? Answer, the same $1 trillion. The is a repricing of loans. It does not go away.
If this did happen in one day it would be a big blow up in the Bond markets. That won't happen. It will take a year. Say $80b a month. That would not blow things up.
Ask the question, "Who is paying for this?" The simple answer is that savers are paying. That has been going on a long time now. This would be a continuation of existing policy.
Ask the question, "Who is paying for this?" The simple answer is that savers are paying.
Well ultimately the US taxpayers would also end up paying for it. If someone owes $500K on a $350K home, no lender is going to loan the $500K at 4% without a guarantee from someone (e.g. Uncle Sam) to make good on the $150K shortfall if the homeowner defaults. It is hard to guess how many of the underwater buyers will ultimately default, but I suspect that a fair number of them will eventually do so. People may lose their jobs, or need to relocate to another area, have divorces or medical emergencies, or just plain get tired of paying $500K for a $350K home. So I think this would end up costing the US government a lot of money.
This is not to say that the plan will not happen. Politicians love plans like this where they can distribute benefits in the present, backed only by a promise of future payments.
I know so many that are underwater on their mortgages and have high interest rates...they can and do pay their mortgage....we are all the hook for these mortgage principle already. Sure, some of these people will lose their jobs, get sick, get divorced and end up defaulting, but they would have done that even more likely at 8 percent interest than at 4 percent, so no more skin in game, but less monthly income in near term to cover long term risk. Some smarty like Nate Silver could do the stats...possibly the lower interest rate wil significantly decrease the number of people inclined to strategic defaulting, so lost income is made up for by saved principal....who knows, we are in uncharted territory.
it's just a shell game old mortgages become new mortgages at a lower rate, but I see what you are asking 7% 30yr to 4% 30yr means someone is eating 300bps a year for 30 years - if the mortgage market is 10t even if half of that were part of the Obamarate™ that's a big number (NYT article linked above (but link is broken here it is again) says $85b per year
http://www.nytimes.com/2011/08/25/business/economy/us-may-back-mortgage-...
I have always assumed that any Fed strategy to effectively extend duration of its Treasury holdings would somehow include a boost to the housing market via mortgage subsidy. Your suggested mechanism (a coordinated plan among government entities) is consistent with rumblings of a housing subsidy plan. It would also tend to bypass Wall Street and the banks in the mortgage lending and refinancing process. Probably not a bad idea considering they have shown a great propensity to invest QE1&2 funds in just about everything but that. Could it be that our Government has finally had enough of these con men too? Curious that Goldman all but flat out denied any possibility of Fed involvement in housing subsidy in their latest analysis of wild-ass QE3 options. All they could see for miles and miles is more Fed Treasury purchases.
I agree, but who will pay the money on the MBS's or to be more exact the difference? The bond holders would have to agree to the change in payment or timing of it if they don't pay the difference. And if they don't the bond issuers are in default pure and simple.
Looks like Mortgage REITs are cruisin' for a bruisin'.
Nice business model. Lend long (private label/GSE MBS) borrow short somewhere, pay the directors/senior employees a hundred million or so and still you can pay a 14% divi (NLY)
Kinda unsettling when you recevie prepays of assets formerly valued at a premium and your net interest margin evaporates and you try to reinvest in this brave new world.
What surprises me is that MREITs have enjoted a strong bid this week. I've been lightening up, glad to extract a quick turn.
Anyone got an explanation?
not enough gold? heh
This begins to sound extremely plausible. Probably most of the people who haven't already refinanced are in underwater mortgages. And the default risk for these mortgages belongs mostly to the banks. (The MBS held by the US gov is supposedly mostly the less risky upper tranches). Under the plan, the default risk would be transferred to the underwriter of the new 4% loan, e.g. the US gov or a GSE. So this plan would be a huge bailout for the banks as well as for the underwater homeowners. And we know how much the Fed loves to bail out the banks. And politicians love this kind of deal where the US gov assumes the risks and large well-connected private companies get the rewards.
Perhaps Buffett had this in mind with is $5B BAC injection.
haha .. the Big O or the Big Owe !!
Bruce, might that "program' be but a mere pacifier for public consumption in order to get the cover needed to pass something like this:
A Huge Housing Bargain -- but Not for You
Roger Arnold
08/18/11 - 05:49 PM EDT
NEW YORK (RealMoney) -- The largest transfer of wealth from the public to private sector is about to begin. The federal government will be bulk-selling the massive portfolio of foreclosed homes now owned by HUD, Fannie Mae and Freddie Mac to private investors -- vulture funds.
These homes, which are now the property of the U.S. government, the U.S. taxpayer, U.S. citizens collectively, are going to be sold to private investor conglomerates at extraordinarily large discounts to real value.
You and I will not be allowed to participate. These investors will come from the private-equity and hedge-fund community, Goldman Sachs(GS) and its derivatives, as well as foreign sovereign wealth funds that can bring a billion dollars or more to each transaction.
In the process, these investors will instantaneously become the largest improved real estate owners and landlords in the world. The U.S. taxpayer will get pennies on the dollar for these homes and then be allowed to rent them back at market rates.
On Wednesday, the Federal Housing Finance Agency (FHFA), the Department of Housing and Urban Development (HUD) and the U.S. Treasury Department issued a Request for Information (RFI) concerning the disposition of the inventory of foreclosed homes owned by the federal government.
An RFI is ostensibly a way for the federal government to get input from the private sector on how to accomplish the goals laid out in the request. But that's really just a facade, as the RFI was structured by the investors to begin with.
Full story here: http://www.thestreet.com/story/11224917/1/a-huge-housing-bargain--but-no...
Or is there another possible connection between these two stories?
effin dutch rudderin bastages...
Stop paying your mortgage. Live Free! Let Barry & Pelosi pay.
Why pay your credit cards and doctors bills. Let Barry & Pelosi pay.
in fact, why pay for ANYTHING? Let Barry & Pelosi pay.
The New American Culture.
I am a firm believer that these types of programs serve one purpose in TPTB's grand plan. Class warfare.
If the scenario as Bruce describes comes true, what does it mean for the prices of gold and silver?
To the moon. This is the ultimate extend and pretend.
The more I think about this, the more I doubt a mandatory re-fi is possible. I think it would definitely require Congress to act, and even then would face likely reversal by the Supreme Court, as it would amount to the confiscation of assets (the income that would be earned if old, higher-yielding agencies weren't forcibly redeemed early) from private investors.
Who said manditory?? If offered a new 4% deal you would say no?
Oh hell yes!
But only if you read the fine print, which will clearly state that by signing the agreement you become a permanent slave to the banksters and government. No ability to "walk away" from these modified loans --- no way out except a jail cell or FEMA camp.
But true, almost nobody reads the fine print until they have problems months later.
True.
When I bought a condo, I made the lawyer at the closing tell me *exactly* what every document was. At one point, the lawyer pushed a new paper in front of me. The conversation went like this:
Me: What's this one?
Lawyer: It says that you guarantee that you'll carry blah blah blah insurance on your condo unit. (Pointing) Just sign here.
Me: But . . the association carries that insurance, doesn't it, not me personally?
Lawyer: Well, yeah.
Me: But I'll be one of something like 175 condo owners at the complex. You're asking me to guarantee what they'll do, aren't you?
Lawyer: Well, yeah.
Me: But that's logically impossible. I can't GUARANTEE that they'll do anything.
Lawyer: Well, yeah.
Me: So, you're asking me to guarantee something that you know damn well I can't guarantee.
Lawyer(sighing in exasperation): You're the first person who ever complained about that.
Yeah, and this kind of crap is not unusual, it is common. Typically when you "buy" anything with significant cost these days, they "require" to sign 11, 17, 23, 37 documents, almost every single one of which is self-destructive to sign. Because there are so many absolute, complete, utter adult-age moron-children who will literally "sign anything", the few of us who are prudent and refuse to sign self-destructive documents are often told to "take a hike", even by companies on the brink of bankruptsy.
I won't sign. Last time I helped someone buy a car, the paperwork liars at the new car dealer swore on a stack of bibles that all 23 documents had to be signed. I finally, after 7 hours on 2 separate days got them though the process with signing only 5 documents, 2 of which they signed "under protest and duress" under their name. Since they were fully paying for the car, there should have only been a need for 3 documents, and frankly, only 1 document if you refuse to submit to the scam that is "title" and "registration".
Almost nobody realizes when they sign these "title" documents, they assign ownership of their car to the state, and only retaining a right to operate the car as long as the state decides to allow them. This is what happens when you sign a birth certificate - you give complete ownership and authority over your children to the state, who can then take them whenever they wish (at least according to their acts, statutes, regulations, practices and especially "color of law").
sums it up well. banksters (financial engineer...ers) and lawyers have transformed us into a FIRE economy designed to defraud consumers via reams of legalese docs and procedural mumbo jumbo damn, what a mess.
Not to mention that they are never that clear in their language.
Obfuscation, FTW!
Obama goin to pay my mortgage (how prophetic was that from Oct 2008)
http://www.youtube.com/watch?v=P36x8rTb3jI
We're here to get our Obama Money (WJR Detroit Oct 2009)
http://www.youtube.com/watch?v=_Ojd13kZlCA
My take on it is that this is an attempt to clean up the chain of title problems created by MERS in the securitization.
New Clean loan + Clean chain of Title= Easy Foreclosure Proceedings.
Market Truth has the right ideas - Quiet Title!
You are right. If one signed up for the new 4% deal that person would waive any irregularities in the title. This goes some way toward solving the MERS problem.
Keep in mind there are $12T of mortgages. This would "fix" 1T. So there would be 11T left. The MERS problem does not go away because of this. It "fixes" 10-20% of the problem.
gotta beta test it Bruce! provided the bond and mortgage insureres don't implode during the implementation phase and pull down all of their counterparties like '08, they only need to cover about 25-30% for those underwater and likeliest to default (now). sheeit, this may actually levitate the res. RE market a bit and the % underwater drops to a more "manageable" level.
While it may "solve the MERS problem" for MERS...it doesn't solve the MERS problem for us. Quite the contrary. It seem to me that this seeks to hide the problem rather than solve it...It's not at all unlike Racketeering.
You are absolutely correct--it is a scam for the banks to reclaim broken title-- a gov't deal with the banks and some back dooring with the congress and we have a replay of the Student Loan no bankrupt language. And it will buy votes for the incumbant--- a win win for the scumbags.
I think the foreclosure paperwork problems and this optional refi program for people current on their underwater mortgages are seperate issues.
No doubt the gov. and banks want the problems with MERS and faulty docs to go away, and the AGs -Miller et al (all except the NY AG-Scneiderman)are trying to push through an 8.5 b deal with BAC, but this program will be Obummer's last ditch effort to get re-elected by "helping the average person" underwater but current with an optional refi program, kinda like HAMP for all.
Interesting and could work. There is one major issue. In the states where the run up was greatest (FL,NV,CA,AZ) the people are under water by 40% to 60%. If I am one of them and currently paying 6.5% on a home worth $100k that I paid $200k for what good is 4%? I'm better off working, living free, and paying cash for the same home in time if I still have a job. Prices are still falling on top of all this.
You could walk. Maybe you should. But how would you react if you got a letter that said, "We're dropping your rate to 4% on a new 30 year. It won't cost you a dime".
If you say yes to the deal. Then you probably will not walk (as you should). So in your case this would be a "successful" kick the can down the road.
We walked last year. Our house (in AZ) was so far underwater that I wouldn't have even been momentarily or slightly tempted at 4%. The vexing thing was we did everything we "should": We put down 20%, no second, bought a house well within our means, etc. (Our stupidity was in thinking that the market couldn't go down further. It could, and did.) We left the day we stopped making payments, because I couldn't justify squatting in addition to everything else. The house just sold for about half of what we bought it for, and in hindsight, I suspect that's a reasonable market price.
I'd still be wary of the strings they're going to attach. And I'm curious to see what happens in 2013 when the rules change on 1099 liability for the shortfalls--or, perhaps that's another can to kick.
By the way, a great, insightful article, as always, Bruce.
" Then you probably will not walk (as you should). " ??????????????
I thought one of the lessons learned on Obama's previous re-fi's was that they did nothing to decrease the risk of another default by the same homeowner.
I have said since the day this started the only way to fix it is with write downs to principle. What about all the HELOC loans out there?
Second mortgages are toast under this plan. That has been understood for a long time. Anyone paying on a second is a dope.
Want proof? You can buy seconds from all around the country for about 5cents on the dollar. The banks have written this swill off long ago.
I keep hearing stuff like "don't pay your second" and "if you are underwater, punt". But is this really the case if you bought what you wanted, and intended to pay it before the crash? In my case, I custom built a house the way I wanted, got a mtg for the build cost, and later (regrettably) got a small second to do some improvements. Yeah, I'm a little underwater, but I was never upset with the original price I paid.
I bought the house I wanted, paid a fair price, took out another loan. Am I really a "dope" for paying it off?
(now, if I could buy my own second OTC, that would be keen)
It is not possible to do a Refi unless the second is satisfied.
I think you should just sit back and watch the mail. From what you describe you will get an offer. As part of the deal the Second will be reduced (principal). A new loan will roll the first and what is left of the second into a new 30 year at 4%.
You stand to win both ways. I have folks I'm helping in your situation. I tell them to pay both the 1st and the 2nd for a few more months and pray you get a letter.
We should know, one way or the other, by Thanksgiving.
Good luck
bk
A massive automatic re-fi implies that holders of agencies would see a huge portion redeemed early while a similar quantity of new agencies would be issued to the market all at once. Saying the re-fis will be at 4% is like saying the GSEs will dictate to the market the price of all that new agencies issuance. Huh? How?
I can only imagine one way this would work: the Fed would buy the new agencies issuance, at a political price, while selling off the portion of its old agencies that weren't redeemed through re-fis to the market, at auction price. It would be a taxpayer-funded bailout, as the Fed's reduced income from swapping into lower-interest agencies would mean that much less income transferred by the Fed to Treasury.
If the Fed and the GSEs could agree this among themselves without Congress, it seems politically possible.
But I'm just guessing.
The Fed could easily finesse this. It would take time for the actual mechanics. Who are the bondholders you're worried about??
Bond funds, InsCos, pension funds and private individuals.
These are all "yield starved". They will be back to the trough. Agencies will pay a premium to Treasuries. So there will be buyers.
Most of this is already in the market. Anyway, no one cares about bond funds or savers....
besides the wealth of knowledge you bring us and your keen analysis; i respect you cause you get down here in the pit and duke it out.
bravo,
janus
absolutely outstanding, mr. krasting.
applause,
janus
Not sure why this isnt on the ZH front page.
I show it front and center at the top of my screen.
Would all of this refi have any effect on the chain of title issue? Does this give banks and other lenders a chance to correct the issues created with robo signing?
Exactly.
The new lenders get a 'washed' title with no impediments to foreclosure when the borrowers (inevitably) re-default...