More on the Mega ReFi

Bruce Krasting's picture
There were three important developments in mega mortgage refinancing story in the past week. Clearly there is something in the works. The questions are, “What?” and How big?”

This first sign came from the Presidents’ speech. He spoke of a ReFi. But he had not one word of detail. Still there are clues:

My administration can and will take some steps to improve our competitiveness on our own.

We’re going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent.

I know you guys must be for this, because that’s a step that can put more than $2,000 a year in a family’s pocket, and give a lift to an economy still burdened by the drop in housing prices.

The WH provided a breakdown of where the new stimulus money would be spent. There was not a nickel in the proposal to cover the cost of any new ReFi program. Note that O states that he can do a big ReFi  “On our own”. This means that he has the money in his pocked to do something. He does not need congress to okay a new plan. (There is $25+b of old TARP money, there is an additional $35b available from the previously funded “Hope Now’ program.) The point is that there is money around with no string attached for the President to pursue a ReFi.

The second thing of note is that late Friday afternoon a was letter released by the FHFA. There was a very significant softening of the language regarding the terms for refinancing:

FHFA is also considering the barriers to refinancing mortgages that would otherwise be HARP eligible but for having a current LTV above 125 percent.

Our objective is to provide borrowers in high-LTV loans who have a history of making on-time mortgage payments with an opportunity to refinance, resulting in reduced credit risk to the Enterprises and added stability to housing.

Bingo! The current ReFi restrictions that require a borrower be no more than 25% underwater and have a 780 FICO are about to be waived.

The final bit of data comes from the CBO. They did an analysis of what the implications are of big refinancing might be. I contacted the CBO on this and they were very clear that the work they did on this topic was not a report on a specific proposal, but rather a generic review.

It is probably correct that any plan that the administration comes up with will vary in scope from the review by CBO. It is also correct that this review has been done in anticipation of a specific proposal. Therefore the review and the conclusions are worth noting. The key assumptions used in the analysis:

(1) Eligibility includes existing loans guaranteed by Fannie Mae, Freddie Mac, or FHA.

(2) A borrower must be current on an existing mortgage and must not have been more than 30 days late on any mortgage payments during the prior year, but there are no limits on the borrower’s current income or on the loan-to-value ratio of the new loan.

(3) The new loan has a fixed rate of interest, at the prevailing market rate, and a term of 30 years.

The CBO has concluded that there are $4.3 trillion of mortgages that broadly meet the above requirements. These mortgages have been converted to Agency MBS. The report looks at what were to happen if 10% in that universe were restructured. The following chart looks at the results.

The bottom line is that 2.9mm homeowners would get a benefit of $7.5b (each year) and the net cost to the government would be a one time hit of only $600mm. A nice trick. Note the individual gain and losses. The losses come from a write down of the value of MBS held by both the Fed and the GSEs.

So how can this be? Where does the money to achieve these results actually come from? That’s easy. It comes from the poor bastards outside of government who own the Agency MBS. From the CBO:

Those investors are expected to experience a disproportionately large fair-value loss of $13 to $15 billion.

Ah! It all makes sense now. Savers are going to pay for the ReFi. The CBO makes this fact very clear:

Most of that wealth would be transferred to borrowers.

Based on all of the above I believe that there is a ReFi plan in our future. This is what I think it means:

I) We get a program that targets $800b to $1 trillion of mortgages.

II) The program will start on 1/1/2012 and end 12 months later.

III) The consequences to the MBS market will be deferred for 4 months. Thereafter the increased monthly redemptions will flow through the MBS market at a rate of 70-80b per month. While painful, this will not result in a collapse of the MBS market (but it could…)

IV) If $1T of Refi were accomplished, it would result in increased demand for yield curve protection by all participants in the mortgage market. This would, by itself, tend to push up interest rates in the 10-30 year maturity.

V) To offset the market implications of #IV the Federal Reserve could respond by absorbing the risk. This could easily be accomplished with “Operation Twist”. If the Fed were to sell some of its shorter maturities of Treasury bonds and simultaneously purchase coupons with an average 15-year maturity, the market implications of the Mega ReFi would be neutralized.

My Take

We are going to see a ReFi proposal along the lines described above announced in the next few weeks. This will justify the Fed to initiate $1 trillion of Operation Twist. That announcement will come on September 21st.

MBS holders will get hit on the head to the tune of $25b. But no one cares about them any longer. Punish the savers.


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chinawholesaler's picture

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dizzyfingers's picture
 RE: More on the Mega ReFi

How do we stop this??


Re: Re: More on the Mega ReFi

Everyone who's in government-backed mortgages should pull their money out immediately. Buy only with cash, don't fund the credit-card companies, which are owned by the vampire banks. If you can't pay cash for something (have to use credit), then you can't afford it. Don't own real estate. Credit for home purchases is the problem, not the solution. Real estate taxes fund the government pensions and benefits. Let them rot. Sell (or abandon) the house and rent a small apartment -- pay cash each month. Don't send kids to college; there are no jobs and aren't likely to be any for quite a while. People who have jobs are staying put. No openings most places. Low-paying jobs never will justify those high-interest school loans by B of A and the rest of the vampires, so don't go to school or send your kids to school if you have to use loans. Buy only what you need and can afford -- no long-term payment agreements for anything. Starve the beast and it'll die, or at least it won't be sucking your blood. Keep feeding it and it'll go on sucking your blood. Got to get the bankster-vampires back under control. Using cash, avoiding purchase of real estate, buying only what you need, renting instead of purchasing a house, and refusing all credit will get the ball rolling toward setting things straight pretty fast. Operation “Mass Refi” – Will It Help Economic Growth or Lower Default Rates?

Last week, the Mortgage Bankers Association reported that their mortgage refinancing index fell rather dramatically, indicating that fewer and fewer borrowers were refinancing even at historically low interest rates. And mortgage purchase applications are stuck in a flat, no growth zone.

We know from home sales and the Case-Shilller Home Prices Indices that the housing market is stalled and may be subject to further home price declines. On top of a flat housing market, we also seem to be stuck in an employment depression and a flat GDP growth patch as well. This Thursday, The Obama Administration is planning to release several plans to stimulate the economy and the housing market.

I had hoped that mortgage refinancings were going to be higher than they have been given the decline mortgage interest rates. In the past, there have been large refinancing (or refi) waves such as in 2002-2004 which enabled borrowers to reduce their mortgage interest rate. There have been smaller refi waves since 2002-2004, such as the 2008-2009 refi waves. But since 2009, there has been relatively little action in refis (although it looked like a refi wave forming recently until last weeks’ decline).

When a refi wave occurs, borrowers gain additional disposable income and MBS investors lose the same amount. And Fannie Mae and Freddie Mac have large retained portfolios of mortgages, so they suffer as well in a refi wave. The surge in prepayments in 2003 and 2004 was an inducement for the GSEs to loosen their criteria in order to generate new, high spread at origination (or SATO) loans to replace the RMBS in portfolio that were seeing very high prepayment speeds. In other words, Fannie and Freddie purchased/insured riskier loans at higher spreads. In 2008, when the Fed again dropped interest rates to provide liquidity to households and boost consumer demand, the GSEs responded by raising the barrier to home refinancing by changing the loan level pricing adjustment (or LLPA). This move defeated the Fed’s Large Scale Asset Purchase (LSAP) program to purchase mortgage securities and thereby drive a significant increase in home refinancing.

In short, the GSEs have made it more difficult for borrowers to refinance their mortgages to current rates (around 4%) that allows MBS and Fannie/Freddie to preserve the higher spread.

With the housing market stalled and the economy at zero employment growth and Real GDP growing at under 2%, there is a sense of desperation in Washington D.C. The Fed’s Quantitative Easing has not jump started the economy and it is doubtful that further quantitative easing will change Real GDP to any significant extent. But if the Federal government reduced the barriers to refinancing it would induce a new refi wave, potentially a huge refi wave.

Enter “Operation Mass Refi.”

Operation “Mass Refi”

It is likely that President Obama will announce this coming Thursday (or shortly thereafter) a program to stimulate the housing market and the general economy. The mass refi idea can be traced to Chris Mayer and Glenn Hubbard at Columbia University. Recently, they have updated their idea in the paper, “BHM-V11-final.”

The plan is to “restring” the HARP program. Since many households are either upside down on their homes (owe more than their home is worth) or have less than sterling credit after the catastrophic bubble burst, the idea is to do away with any credit requirements and ignore the upside down problem and ask borrowers to apply for a loan modification. Here is a chart of how many loans they want to modify:

So, there are about a little over 22 million borrowers who would be eligible for a mortgage refi at 4% (or whatever the rate is at the time of the modification). Suppose that 22 million borrowers save an average of $300 per month. That would result in about $6.6 billion in savings per month or $79.2 billion in savings on an annual basis. [This number is likely smaller since the authors recommend that borrowers be current by at least three months].

Is $79.2 billion per year in borrower savings a big number? The economy would welcome an additional $79.2 billion per year in disposable income. However, the annual Personal Consumption Expenditures for the U.S. was $10.25 trillion in 2010, so $79.2 billion is less than 1/10th of 1% of annual PCE. So, a mass refi will unlikely change the course of the economy.

On the other hand, $300 in savings per month per borrower may, in fact, slow down defaults. That is the good news. But defaults and foreclosures have been slowing already, so the benefit of the mass refi is muted compared to two years ago.

The cost? That is easy. It will cost someone (or something) $79.2 billion per year. If the GSEs (Fannie Mae, Freddie Mac and Ginnie Mae) pass the lower interest from the mass refi onto Agency Mortgage-backed Securities holders, the Agency MBS holders will experience $79.2 billion per year less than they were expecting. Who hold the Agency MBS? The Federal Reserve/Treasury, banks, foreign investors and mutual funds/private pension funds.

And bear in mind that Fannie and Freddie hold MBS and loans themselves, so they would be the recipients of losses as well.

I certainly don’t image that the banks or foreign investors will be thrilled with the mass refi proposal, although the banks will receive fees for performing the modification (see Boyce, Hubbard and Mayer for their estimate in costs).

To be sure, this is an interesting idea, but a calculated risk. On the one hand, it could help increase consumer spending (if the borrowers actually spend it rather than save it) and it could reduce defaults. On the other hand, someone pays for it and it looks like banks, foreign investors and Fannie/Freddie (thus, taxpayers) are the likely losers. And confidence in our Agency MBS market will likely suffer.

So, there are tradeoffs since nothing is free.


Whether it works or not, it does represent wealth redistribution from taxpayers and MBS investors to borrowers IF their loan is held or insured by Fannie Mae, Freddie Mac and the FHA.


With the announcement of the GSEs’ regulator FHFA suing the banks over mortgage loans, a mass refi on top of the FHFA lawsuits would be unwelcome news to the banking system (despite the fees that the banks would collect).

So, let’s see if the Obama Administration is actually going to pursue Operation “Mass Refi.” It is only a rumor at this stage.


    By tonys4412w, on September 3, 2011 at 1:20 pm , under Banking, Commercial RE, General Economy, Housing. 1 Comment
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  Barry On September 5, 2011 at 11:38 pm
Permalink | Reply

B-H are wrong when they say that their plan adds no new risk to the taxpayer. Prior to 2008, the taxpayer had no risks with any FNM/FRE issuance.

The taxpayers are paying an enormous price for Bush’s decision to seize FNM an FRE. Neither ever came close to claiming a full faith and credit guarantee. It was explicitly stated on bond docs that there was no such federal guarantee.

Now, every FNM/FRE MBS has a ‘government guarantee’. This is a burden of several trillion dollars placed on the backs of the taxpayer by G. W. Bush and Hank Paulson (and they are the ones the Tea Party praised to the heavens!)

September 8, 2011 4:01 am

CBO casts doubt on mortgage refinancing plan  

A US initiative to refinance loans held by millions of homeowners with new government-backed mortgages at current rock-bottom interest rates would saddle private investors with twice as much in losses as borrowers would get in payment relief, researchers at the Congressional Budget Office have found.

The working paper considers a one-year model plan in which homeowners who are up-to-date on their loan payments could refinance into fixed 30-year mortgages backed by Fannie Mae, Freddie Mac or the Federal Housing Administration. Some 2.9m mortgages worth $428bn would be refinanced, saving borrowers $7.4bn from lower payments and averting 111,000 defaults at a cost of about $600m to the US government, the CBO said.

But investors in mortgage-backed securities guaranteed by the US would lose about $13bn to $15bn from prepayments on securities yielding above-market rates, the economists say. The programme’s impact on economic output and the housing market would be small, they say. It would also have just a “minor” impact on future home prices.

On Thursday President Barack Obama will deliver a speech outlining his plans to boost the slumping economy and generate new jobs. He is expected to address the moribund housing market, but is unlikely to announce any major programmes to reduce foreclosures or spur home price rises.

The White House has long considered launching a mass-refinancing scheme after previous housing efforts fell flat, particularly with respect to government-backed mortgages for which taxpayers are already on the hook, but the administration has run into opposition from Fannie and Freddie’s regulator, the Federal Housing Finance Agency.

Last year, a team led by Richard Berner, then Morgan Stanley’s chief US economist and now a counsellor to US Treasury secretary Tim Geithner, released a paper arguing that such a refinancing plan would revitalise the economy by saving borrowers $46bn per year in mortgage obligations. It was titled “Slam Dunk Stimulus”.

The CBO has now effectively thrown cold water on such a plan, and vindicated Edward DeMarco, the FHFA acting chief, who has come under criticism from members of the administration for stymieing their proposals.

“The study recognises the enormous losses private investors would suffer in a transfer of wealth to borrowers,” said Joshua Rosner, a housing finance expert and managing director at independent research firm Graham Fisher & Co. “While such a transfer would be acceptable to some in Washington ... it would result in the unwillingness of investors to buy mortgage-backed securities without charging an exorbitant risk premium to compensate for the event the government does this regularly.”

About 54 per cent of borrowers with 30-year loans packaged in government-backed mortgage securities are paying interest rates higher than 5.5 per cent, according to the CBO. The prevailing market average is about 4.2 per cent, according to Freddie Mac.

Under the refinancing plan, Fannie, Freddie and the FHA would save $3.9bn from fewer defaults but the Treasury department, Federal Reserve and Fannie and Freddie would lose $4.5bn on their mortgage securities holdings, resulting in a net loss of $600m, according to the CBO.

Elizabeth Duke, a Fed governor, last week called for fresh government action to rescue troubled homeowners. She noted that the administration’s existing mortgage relief scheme, the Home Affordable Refinance Programme, had only helped some 800,000 borrowers, even though about 4m are eligible.

“Finding different approaches to the policies that are hindering refinancing would likely provide some support to the economic recovery,” she said.

The Financial Times Limited 2011.

the grateful unemployed's picture

from a mortgage holders perspective, assuming you are not underwater on the paper, you should take the money, if you can get it, with the caveat that you place the proceeds in the bank for a rainy day fund. i guess that is the advice from all this.

much of the discussion is confusing, but it seems that as long as you remain current there is no reason not to accept a lower mortgage rate, assuming you are eligible for a new refi. and the purpose of the program politically, is to spike personal spending

there is no future in simply helping out people who are too broke to know the difference.

now that said, is there some way to position yourself to get one of these loans?

look at the chart of the XLY to the Dow and it looks like someone is pricing in a nice move in this sector. forget the economy, just spend baby (well take the cheap money and just save baby)



Miles Kendig's picture

More QE lite is needed along with increased stability within the remainder of the fed MBS portfolio

Ropingdown's picture

I find it remarkable that this discussion is taking place without any complaint whatever about the actuality of Fannie and Freddie losses being treated in the media (and by governmnet officials across the board) as tax-payer liabilities.  For decades we were promised that F and F bonds were not the tax-payers' responsibility.  The bonds themselves say they do not have the full-faith-and-credit of the US government.  But through a remarkable PR coup, even on Zero Hedge the idea of a tax-payer cost to "fix" F and F is treated as OK.  No.  The conservatorship is not a receivership, and the failure of F and F's bonds is not a tax-payer problem.... unless you, we, passively allow the fraud on the tax-payer to continue.  What gives?  Why the acquiescence?  The so-called profits taken out of Fannie and Freddie by shareholders were enormous, as were the trading profits on Fannie and Freddie's shares over the last twenty years.  Of course the mortgage market in the US would have to be reorganized if a hair-cut were given to F and F bond-holders.  So?  Next time the system will, one hopes, hold to higher standards as to credit and terms.

franzpick's picture

"I know you guys...":

Sounds very close to 'you people'...

besnook's picture

some interested party must file a class action slawsuit against the banks that perpetrated the fraud that the original mortgages are evidence of forcing the banks to writedown the loans to the current value of the homes while, at the same time, legitimizing the mortgages legally and ramping up the lender business. the homowner wins, the banks get legitimate paper, the mbs market returns and the system resets. the fed and .gov can backstop the whole process with a tarp/qe like bailout that may actually do some good.


the other great idea is a cash giveawy of 10000 grand per citizen and let everyone reset themselves causing a massive one time 20-30% shot of inflation that would force the reset of the entire economy.

topcallingtroll's picture

Bruce please answer the question.

Who is going to buy out all these loans at par from the all the MBS's out there?

Where will the money come from to buy so many loans at par?

Bruce Krasting's picture

This is not new loans that need new money. It is a re-pricing of old loans.

Assume it all happened in one day. (It will take a year) If you went to bed and there were 12T of mortgages outstanding how many would there be when you woke up? Answer: The same 12 T.

This is moving the deck chairs on the Titanic. But there is no new ship out there.


Augustus's picture

Every refi loan involves sending money back to current lender.  those funds will be available to puchase new MBS.  All done at par.

Mediocritas's picture

I predict the "austerity effect", whereby the plan to fix the problem actually makes it worse. Unintended increase in deleverage.

ncdirtdigger's picture

Can't the nice government man just hand out checks? That would save a lot of paper work.

boiltherich's picture

The current ReFi restrictions that require a borrower be no more than 25% underwater and have a 780 FICO are about to be waived.

Good work Bruce, I will read anything you have to say about the subject since I selectively defaulted July of 2009 and moved out of my house the following February, they foreclosed July of 10 but never sold it and now I find I am still the owner and the foreclosure cancelled, in Oregon that means I am responsible for the place.   

Currently one is eligible for a ReFi as long as LTV does not exceed 125%, it would appear they are going to expand this new mortgage ability to people who are deeper under than 125 like I am.  Current market value of my house=$67,000  Current mortgage as of the day I moved out in 2010=132k so my loan to value is what?  197%.  I would not care if they lowered my interest rate to ZERO!  I am still not going to remortgage my house and commit to 30 years of payments to essentially buy a house worth half what my mortgage principal is.  One of my neighbors paid 204,000 for her house which is now worth 67,000 for an LTV of 300%.  She defaulted in 2008 and is still living there unmolested. 

What this says is that if you are so underwater that you do not qualify for refinancing at the new lower rates now you will be, but who is going to refi when they are so excessively underwater?  Not to mention these loans will be restricted to those with good payment histories, how many people still have clean records of payment when they are so upside down?  In fact the only people who will qualify are those that would have qualified under HAMP but a few extra who are even more under water, and those would have to be bone stupid to refi such a large LTV mortgage. 

Fanny, Freddie, FHA?  What about USDA Rural Development?  HUD?  Farm Home Administration?  Ah, those had in many cases zero down requirements and/or lower income parameters to get a guarantee.  Like my USDA backed loan. 

So for all the Reich wingers out there that think I am about to get a gift of money stolen from you, I would not take the deal even if they reduced my principal to fair market and interest to 4.  Three years plus of falling values and unpaid HOA dues, with owners renting out to anybody that can write a check have turned my brand spanking new (2006-7) neighborhood into an unlivable slum. 

Bruce Krasting's picture

Sorry for your situation. This Refi does nothing for you.

There are 50mm mortgages outstanding. The refi plan could address AT MOST 10%. I think it will be very hard to get that many to sign up.

I do not think this plan will actually fix the problem. It is a delaying tactic, It is also political. The administration will say that it has helped X number of homeowners. It is a sound bite.

Implicit simplicit's picture

Many people will make the same decision as you did. Why bother even paying your mortgage if the value of your home is underwater, unless one feels they must for personal and extraneous circumstances. Also, just because fannie and freddie own the mortgage, there still could be paper trail problems. By signing the paperwork people probably forfeit the rightt to challenge foreclosure rights by the servicers. Fannie would probably love to get problem paper trail mortgages locked into the new program as quickly as possible, before RE depreciates more as it surly will.

boiltherich's picture

I found out the hard way that when you think the house values cannot drop much more you can be very wrong.  My neighborhood was built in 2005-6 and units were selling for 204k new into 2007, I looked but did not buy because I thought they were way overpriced.  I waited till the bubble popped in 2007 and by 2008 prices were almost half what they were just 18 months before, I got mine at 129,900 which was 20k below the cost of replacement for insurance purposes.  I thought it could go down a few thousand more, maybe ten, but as the market stabilized it would all pop back up, not to bubble levels, but at least to the replacement values.  Within a year prices in the neighborhood had dropped to 80 thousand asking price, but that was speculative theory because nothing was selling.  Finally a unit sold 6 months ago for $68,000, but now another has come on the market for 65.  Of all the empty foreclosed units ony two are on the market.  And I am guessing they will go lower yet, like the saying goes, the market can remain irrational longer than you can stay solvent.  I thought it was safe to catch that falling knife and I am now telling you all do it with the full knowledge that you will likely get burned, and the worst part is it will be you who were the asshole that did it to you. 

Caveman93's picture

So a credit score means shit ...exactly what I expected it to mean.

Zero Hedging's picture

I don't believe this will solve anything.  It's not about higher interest rates.  It's about property values.  Prices will continue to decline as the world economy crashes down.  I don't care if you have a 1% interest rate.  If you owe more than someone is willing to pay then you still have a problem.  Smart people will not refi, just stop paying and make the criminal banks take the hit.  Until the government stops interfering with housing and the economy we will not see a bottom.


Astute Investor's picture

Your spot on that it will solve nothing.   You need to correctly identify the problem before you can come up with the proper solutions.  The TPTB cling to the belief that the housing problem can be solved by continuing to lower interest rates.  Unfortunately, housing is primarily a solvency issue which cannot be rectified even with a 0% mortgage rate.

blunderdog's picture

Nailed it.

The idea must be to find a way to maintain the housing price inflation at a level that no one notices.  The problem is that it can't be done while the American credit-consumer is still maxed out.

Until 70% of the population is "doing well" in relative financial terms, housing values can't bottom.  There'll be no market, regardless of what convolutions people went through to prevent clearing and price-discovery.

I am Jobe's picture

Bend over and no vaseline for taxpayers. Once again the 2X4 shoved all the way up your azzz, US Citizens.


enobittep's picture

Bruce - another great piece of financial research - you have great talent in this respect. Thank you. What are your thoughts on the agenda behind such a proposal? Is it a genuine attempt to boost the economy hoping triggers a "real economic resurgence"? Or is it only creating another interest group beholden to TPTB and who will vote the in for additional terms? I believe it is the latter - taking advantage of another opportunity to create dependance on the government and to divide hard working people with integrity from those who are not. Is this another step toward a civil war where TPTB can institute a regime more to their liking?

Bruce Krasting's picture

This will not move the needle. The CBO number was 7.5b. Double that, $15b a year.

That is a rounding error in a 15T economy.The proposal to cut FICA taxes in half is a stimulus of $175b. This is peanuts.

It would help some folks. But the real value is politics.

sun tzu's picture

I don't see how MBS holders will take the hit with refis. Once the refi occurs, the MBS holders get their principle back and they can reinvest where they please. It's no different than any other refi

Concentrated power has always been the enemy of liberty.'s picture

MBS guaranteed by Fannie and Freddie are never at or below par in this 0 Fed Funds environment. Investors are massively overpaying for the bonds for yield, so they are paying more than par value to get a yield that's better than the 0 that cash pays. The assumptions on pre-payment in a non-manipulated world work towards the above's ends. The banana republic refi that Bruce is talking about will massively hurt investors holding this paper for their reserves.

Mariposa de Oro's picture

I don't think this is an attempted solution as much as setting the stage for future asset confiscation.  TPTB HAVE to know that the worst is yet to come; that more people will lose their jobs, inflation will increase, etc., and that what's left of the middle class will find it harder and harder to pay their mortgages.    Sorry but I don't trust these SOBs at all anymore.  Nope, this is just a baited hook for the sheeple.......

topcallingtroll's picture

Yeah now i see it is clear you have never seen the contract language on MBS, Bruce.

The originating bank may not unilaterally change the terms on an individual loan in the MBS. The only option the bank has to modify the terms of an individual loan within the MBS is to buy back the loan at full value.

There will be no wholesale refinancings at the expense of the owners of any particular MBS.

topcallingtroll's picture

This may hurt savers in general, but it is also a major win for some tranches. Dubious titles on loans about to go sour will be bought out at par.

This is the piece that is missing. There is not enough money to buy back every loan with a credit score of greater than 540 with an underwater loan. So it will be much smaller than people think. The tea party wont stand for that much money printing no matter how hard they try to hide it.

It is a backdoor bank bailout.

Concentrated power has always been the enemy of liberty.'s picture

nope, these are agency mortgage backed securities, read my reply above. It will hurt not help banks.

Escapeclaws's picture

This should really help the banks maintain the fiction that the value of the mortgage collateral is indeed 100% of the amount loaned.  After all, a willing debtor signs the refinance agreement, thus establishing a new market value that happens to coincide with the fictional value assigned by the bank.

Considering that house prices are likely to decline even more, what sensible borrower would allow himself to be suckered into this scam?

Mr. Populus Potus, always working for you know who!


kaiserhoff's picture

Great post, Bruce, but you missed one point.  We do not have market interest rates.  We've had Soviet Central Planning interest rates,...  for the last ten years.

Amish Hacker's picture

Bruce, is there something special in the water being piped into the Krasting residence? By my unofficial count, this is the third or fourth great article you have posted this week. We mere mortals are starting to feel like hopeless deadbeats and underachievers. Take the rest of the day off, will ya?

Bruce Krasting's picture

Tks. I'm packing it in for the day. Tomorrow I'll take on the G7............

hooligan2009's picture

look, sad as it is, if you borrow money to buy something by negotiating a term and a rat eof interest, this is called a contract. it doesn't matter if you are buying a degree, a car, a house, a boat or a business, there is a contract. if you then fail to honour the terms of the contract, people either come round to break your fingers and knees or to seize your assets. the people who seize your assets then have the task of realising some value from the asset they have seized. sure the lender can tear up the contract and give you a more favourable one, but the point is that in a securitzation, fraudie, funny, sally, fhfa, dont own the asset either. they have sold it on to investors. now, if you change the terms of a contract where you have no interest, other than an agent, one of two things happens. 1, you get laughed out of court and told to play in your own schoolyard or two you cause financial collapse and the the breakdown of the law of contract. not just in finance, but in all contract law. you can't cheat to win.

topcallingtroll's picture

Correct. The contract language is clear.

You cannot unilaterally change the terms of a loan that has been packaged into an MBS. Contract language wont allow that. The originating bank must buy back the loan at full value. That is the only option available.

This is why the only way it works is for fnma to sell a trillion dollars of bonds to the Fed and then buys up a trillion dollars in mbs loans at full value. A complete win for the banks. The tea party wont allow a trillion dollars in new money to magically appear.

donsluck's picture

The "tea party" which is not a party, will allow it if it first passes through the military digestive system.

"Ah Scotty twas a good lad, pity his liver gave out so young. Asked to be buried with this pint o' 50 year old scotch."

"Happy to oblige, d'ya mind if I pass it though my kidneys first?"

csmith's picture

It all makes sense now. Savers are going to pay for the ReFi.


This is somehow a news flash for you Bruce? Savers (and prudent individuals in general) have been paying all along because there is no other source of wealth! Deflation is a benign and often beneficial force if you've not taken excessive risk. It is the sworn enemy of government because government is the refuge of the imprudent.

Money 4 Nothing's picture

In my opinion, it is to convert distrestressed home owners into renters. IMHO.


The Bad Guy..

??'s picture

MBS holders will get hit on the head to the tune of $25b. But no one cares about them any longer. Punish the savers..


that's per year, right?

one and a half points on a trillion in mortgages (or is it two and a half points) I though 5.5 was the current average

and the duration of those mortgages?

 on the back of my envelope that adds up to $15b/25b each year that someone (savers) have to eat for what? 10 years

am I missing something?  Bruce you input would be much appreciated thanks



Bruce Krasting's picture

The mortgage market is about 12 trillion. This might change 1T. So less than 10%.

The loss will be spread out over a year. The loss will be very diverse.  This is not that  big a deal. The S&P lost $1T in market cap in a few days last month.

The loss is not recurring. This happens all the time. Ex. Muni bonds are all callable. When interest rates fall, they refi. Holders of the bonds get their money back earlier than they had hoped to. But that is an opportunity cost, not a loss.

??'s picture


so .gov backs any risk to facilitate the refi - the mbs holders pay (once) rest is opp cost

the mortgagees get a windfall (that they would have gotten anyway if the banks had been willing to refi)


this sounds like it almost makes sense by putting $15 or $20b per year into the economy for a one time cost (and the difficult to measure risk component)


The payroll tax cut I believe was worth $120b in 2011 so this refi scheme seems like a drop in the bucket except for some stability to the housing market except the beneficiaries of this as you describe it aren't the foreclosure risks.

and as for the consumer who is the beneficiary they just buy more crap made in a slave factory somewhere so the multiplier so many talk about is likely not what it once was.


(and the unintended consequences of reduced foreclosures  such as this )

topcallingtroll's picture

They already tried but failed to make mbs holders take the hit with the countrywide settlement. The contract language is clear. If I bought a tranche of MBS from the originating bank the bank cant just change the terms on the individual loans. The originating bank must buy out the individual loan at full loan value.

Why are all of you ignoring the contract language which prevents the government and banks from hosing the mbs owner by substituting loans with less value and lower interest rates. Before the originator can do that he must buy back the original loan at FULL value.

boiltherich's picture

Homeowners have the right to refi and there are 50 states with 50 sets of laws that permit it.  If you invested your money insecurities which were  backed by mortgage notes you might have a case against the bank that packaged the securities but you have ZERO recourse against the homeowners that gave no consent to have their mortgages sliced and diced and held by 20 million people in 66 countries, and they have a RIGHT to know who hold the note. 

MBS investors are no different from any other investors, they gambled and some will lose, some more than others. They can just go sue the bank that lied to them.  As to the economic impact of the investor class getting his ankles nipped at TFB is all I can say, never invest more than you can afford to lose in any single product, if you do not understand that then you probably need a conservator to handle your funds.  I would rather see thousands of savers get singed rather than see so many families get burned because their houses are essentially traps of the banking elite.  The game has changed, the rules will change, get used to it because that is life!

topcallingtroll's picture

Everyone has the right to refi, but the old loan must be paid off in full. Dont you get it? It means that the presidents plan cannot get off the ground. Someone has to buy back that original loan at full value. This is trillions in money printing.

And yes the homeowner did give consent for his mortgage to be sold any way the bank saw fit. Do you not read the mortgage paperwork before you sign it? You gave consent.

boiltherich's picture

First troll, if a mortgage is backed by the government as is the case with Fanny Freddie, USDA, FHA, HUD, etc. it can refi the loans if it chooses to, you can say what you want but practical reality demands you at least admit that much.  Second, when I signed my mortgage papers at the closing there were inches thick folders of documents requiring no fewer that 40 signatures and initials, and I could not tell you what all that legalese was, but I do know that NO MATTER what was in those documents if there were clauses that demanded, implied, or set any conditions by which I would unknowingly waive my rights or which violated my state's real estate laws then the contract is as void as if it had never been dreamed up in the first place. 

One of the most basic black letter foundations of business law is that if a contract is made in bad faith or substantially violates the laws of the jurisdiction it was executed in then that contract is just flat out void, and if frauds were involved both civil and criminal charges can be brought. 

Last, what is to be gained for all those poor innocent hapless "savers" who would get burned if the mortgages all go into default and the banks change their names and start over elsewhere?  If the houses all rot into the ground?  Skip the saver bullshit,investors are NOT guaranteed a return on investment, and they are not even assured of a return OF their investment, next time they can damned well stick to investment products that they know the function of. 

Stax Edwards's picture

There is no substitution, it is paid off and new investors (presumably the same folks) will buy the new MBS.  They pay a premium to treasuries and are government backed, so they will move.  There is no change in loan terms as you claim, it is a refi.

topcallingtroll's picture

Who is going to pay off a trillion dollars in loans when the collateral is worth 500 billion? Where will this money come from?

sun tzu's picture

It doesn't come from anywhere. It is simply a refi. No new money has to be invested nor created. They are allowed to refi the same amoutn they owe, except at lower rates.