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On the (not so) Mega ReFi
Finally some details on a plan that has been whispered about for six weeks now. Actually, the information available begs some questions. Some thoughts on what was released from the FHFA yesterday:
- I’ve said from the start that the fatal flaw in the Refi program is that it only includes those who happen to have their mortgage held by Fannie and Freddie. About 40% of the mortgages that would otherwise qualify for a new deal are getting nothing.
This is the telephone number to determine if you are eligible: 800-7FANNIE. Four out of ten who call will be told to buzz off. The reason is that they got a mortgage from a Community Bank.
Obama is going to take credit for the refi program (he already has). But he’s also going to take a ton of flack from those who get left out in the rain.
- On the topic of fairness, there is one condition for eligibility that got me a laugh:
The current loan-to-value (LTV) ratio must be greater than 80%.
In other words, all “good” borrowers (LTV<80%) need not apply. To qualify for a new mortgage today one would have to put down a minimum of 20%. How does one characterize the refi? Subsidy comes to mind.
- In order to have a chance at a refi one must also:
*Have a clean payment history. (One late payment in the past 12 months is okay). There will be a waiver on any LTV (no need for appraisal).
*Have entered into the mortgage prior to May, 2009.
So there are a lot of hoops to jump through to take advantage of what has been offered.
- FHFA is very vague on their estimates of how many mortgages will be eligible. The guess is that it might be as high as 900,000 by the end of 2013. The program does not start until January 1, 2012. Thereafter the number would be about 37,000 a month.
What does that mean for the economy? The answer is not much; at least not for 2012 (Beyond that is anyone’s guess).
The average mortgage is $200,000. Assume that the savings from the refi 1.5% and the closings commence in March of 2012. The result is that there is a monthly reduction in the mortgage payment of $333. By the end of 2012 there should be about 370,000 refi’s completed. That would put the full year total interest reduction at $680mm. ($540mm adjusted for taxes)
While this is clearly good news for those lucky enough to get the Refi, the $540mm is not a big number in our $15T economy. Obama’s (busted) Jobs Program was supposed to provide a stimulus of $435B. The economists who looked at it thought it might add 1.5% to total GDP. If the same logic is applied to the Refi program the benefit would have a stimulative effect of only 1/8% of GDP. Yawn.
- There is a question of how much interest savings can be achieved. As of today, the cheapest Refi for a new 30 yr mortgage would be ~4.25%. To achieve a net 1.5% savings, the old mortgages have to be 5.75% on average. This rings wrong to me. I think the average for those who are otherwise eligible is meaningfully lower than 5.75%. This suggests (to me) that the benefits will be muted.
- Many have written to me that the Refi is a plot to eliminate any prior flaws in the loan documentation. I don’t think so. But I’m not a lawyer. It’s best to check with your own counsel. The FHFA is actually waiving prior Representations and Warranties made by the borrower and the originator of the loan. From the FHFA:
Reps and warrants protect the Enterprises from losses on defective loans. FHFA has concluded that eliminating the reps and warrants will be good for borrowers, housing markets, and the Enterprises and taxpayers.
- There is no discussion of fees/expenses in the FHFA news release. That’s interesting. The proposal is for ~1mm refi’s over 24 months. How much is the re-documentation cost for one of these? $2,000? Who pays for that? Is the cost added onto the principal of the new mortgage? Do the Feds pay for all/part of it from the Hope Now money that Treasury is sitting on?
The expenses come to about $2b over the first 24 months of the program. That money will go to lawyers, banks and loan servicers. I, for one, am very happy that the bloodsuckers get another 2 large. It’s interesting to note that the fees eat into the benefits of the refi such that the first two years of interest savings are lost to the costs.
- The lower the refi interest rate, the better the economic results. This raises the question of, “What’s the Fed’s role in this?"
Bernanke has already pulled out all of the stops to assist refi’s. We have perpetual ZIRP, QE1&2, the Twist and a change in Fed policy to reinvest principal payments back into new MBS. As a result, we have 10-year Treasuries at 2.25%. The refi works much better if the 10-year is at 1.50%.
My conclusion is that the Fed will announce a new LSAP (QE-3) in the not too distant future. While I see this coming pretty clearly, I still want to vomit.
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If I had a deeply underwater mortgage, it would certainly be tempting to simply stop my mortgage payments and live in the house rent-free for a couple of years until the bank finally decides to foreclose. The banking system is absolutely evil and if there is a legal way to force the banks to take losses, then I am all for it!
Thanks for your coverage Bruce. Muy importante aqui.
thanks for the great info. junk car for cash
This isn't a plan, it's a "get out of jail free" card for the TBTF. Once the borrower refi's the originating bank is off the hook. It also has no effect on the borrower being underwater. Most would be better off to just walk away.
Also, as of everything which has been written thus far about this plan I've seen nothing definitive on whether this is a "recourse" or "non-recourse" loan. I'm guessing the new loan become recourse to they can more firmly implant the hook into the borrower (for the rest of their lives).
If you agree with me that collapse is becoming unavoidable, don't despair, prepare! http://www.collapsenet.com/262.html
I have a 10 yr interest only at 6% that is due in six years and tried a refi but was told that I needed to come to the table with twenty large. I qualify and will happily accept a lower payment and the ability to get a 30yr fixed.
Well good for you, Goober, but why should you get free money at the expense of the taxpayers?
Oh, I forgot. It's a bribe from the HNIC.
My federal tax bill for 2010 was over $70,000. I am the f'ing taxpayer.
fair enough Inteligator
Amen brother. Go get your refi on - hope your mortgage is owned by Freddie or Fannie though...
BTW, you need a new accountant - you're making at least $260k to pay that much in taxes with no deductions, and assuming you're not making over 1mm (this may be a flawed assumption), you can structure yourself down to less than $70k in taxes.
Why would anyone want to refi now? Most houses are underwater and should most likely correct even further down in value to finally wash this market back to a sustainable level.
This program:
(1) Allows the banks to make another chunk of money through processing fees.
(2) Restarts the time clock on the loan and front loads more interest payment money to the banks.
(3) Allows the banks to correct faulty title documents back into a screw the borrower form.
(4) Most importantly, it allows them to re-mark the loan packages back to full value on their assets sheets without threat of having to ever mark-to-market.
(5) Even more importantly, the banks, yet again, can restart the engine of MBS and repackage....leverage...and remarket this $hit all over again.
Hmmmmm.....sounds absolutely perfect.....FOR THEM. If the banks don't ever pay for their mistakes......why in the hell should a borrower ever repay them their loan....the moral hazard just keeps getting even wider. I am sure plenty of people will flock to this, just like they flocked to no-doc loans.
Good points all...I was wondering how much this was going to throw back into the economy and the more I think about it, if the number is large, it hurts Fannie/Freddie and if the people that take advantage think that this recession is over and haven't learned a damn thing about being underwater then they will go buy pizzas and new shoes with their "savings"...I would bet half that money goes to pay down credit cards and never ends up creating growth at all...
All your points are dead on, and should ring truth to Bailout-Bruce, Mr. financial abortion for banks, himself.
Although a following of pissboy's on ZH, he speaks nothing but blather and self interest - socialize the losses of the rich. After making a personal fortune on the S&L crisis, it's okay to sell out your ass while talking out your mouth.
Make no mistake about it, in his hayday Bruce contributed to the problems we have today, but one would never know he's got taxpayer blueberry pie all over his face and in his personal accounts.
Right Bruce? You lapped up the TARP vomit. Tell us again how good it was for the common pissboys.
This "plan" is nothing more than headline bait for B-O's willing accomplices/friends in the MSM. In sum, it does nothing more than nibble around the margin. This is no omnibus "fix," and will benefit rather few -- or perhaps I should say, very few will likely participate at all.
Five Stars!
100% agreed... Matt Huston Ex2
The proverbial wolf in sheep's clothing...I've been saying that this is just a back door bailout of the TBTF banks made up to look like a social program to help the 99%. You can't polish a turd. Even if people can afford to stay in their homes with new lower payments, will the payments be lower than competing rentals? If home values continue downward, how many of the loans will end up as strategic defaults? How about the folks who CAN afford to make their payments? What happens to the folks collecting income on the bonds secured by those higher interest rate loans? Meredith Whitney has a new ally, the big O's refi program. The pension funds and unions ought to be screaming. Lastly, how about the folks whoe don't have Fannie or Freddie deals...methinks part of this deal was to limit the losses of Fannie and Freddie..all about trade offs, eh? There is a BlackSwan lurking out there, I can feel it...but then Barry O is smarter than me so he probably has everything figured out already.
This is much ado about nothing.
Most of the fraudulent loans have been pushed back onto the banks already.
It only applies to those who could get a loan anyway based on credit score.
It only applies to those who are underwater as everyone else who could have or should have will have already refied.
So to those it does apply to it makes no sense to refi. It makes more sense for those people to buy an new house and walk away from their current home.
OK the Wife and kids may bitch and complain but it will proabably save them money in the long run.
today people have to do it because they don't have a choice - unfortunately... french door refrigerator
Once again Obama is just trying to help his wonderful constituents who were lied to by the banks and forced to get home loans they can't afford. That is why they voted for him, gonna get some Obama money. How much do you want to bet the ratio of Blacks and Hispanics who get a modification to whites will be 100:1.
The majority of recent mortgages were FHA loans taken out by young white families purchasing their first home using the homebuyer credit. No help for them I guess.
I have a 5% FHA loan not owned by Fannie or Freddie for my home I purchased in May 2009. I guess I don't have any chance of a refi. There is no point to drop my rate .75% if I need to pay a couple thousand dollars in fees. The county just came out with its latest property appraisal and the value of my house has dropped $15k since 2009. I was hoping I could get a new loan based on the latest value with a lower rate, that would have saved me some money.
Once again a productive member of society that actually adds to the economy gets the shaft while the drugged out whores get another bailout. Guillotines are the only answer.
I got the point where you only has the 800 number ... there are web based look ups as well ...
http://www.fanniemae.com/loanlookup/
https://ww3.freddiemac.com/corporate/
I would also add that if folks do re-fi under Obama's plan (which I am mulling over at the moment - I need more details), this will mean big principal payments hitting the fed balance sheet which curiously is pregnant with lots of under-performing MBS.
Jim Rickard's has been saying their balance sheet is so big now, that principal and interest coming in the door are big enough to float a lot of the bonds being issued (not all, but a good sized chunk). If re-fi became very popular, the fed may very well be able to avert an overt QE3 and simply roll that pay off principal into new treasury purchases.
Anyway, just wanted to share the links if anyone wanted to know if their mortgages are held by fannie/freddie.
Regards,
Cooter
Yup. Figures. Our mortgage is not owned by either. And BofA is unwilling to talk because we're current. Talk about moral hazard. If we were up to our ears in credit card debt for iStuff purchases and behind on our payments, they'd be falling over themselves to refi and reduce principle. Since we live within our means, they'll just keep everything as is.
It's hard to remain forthright.
So you're a 40%er. You lost. For no reason at all. I would be out of my mind with the unfairness of this.
How could this happen?
Well, nobody ever said life was fair, that's for sure. What can we do other than continue to live frugally? At some point, inflation will raise food and fuel costs to where what little fluff is in our budget will be eliminated. At that point, the mortgage becomes last on the list of priorities. It's more important to put food on the table, clothes on our backs, and to keep the lights and water on.
In a way, it's easy not to despair over it. Once you realize that you can't get blood from a stone, you understand how ridiculous it is to become despondent. We'll pay until we can't. And when we can't pay anymore, well, things are probably going to be really bad for a lot of people.
paper-pushing fucknuts stealing real wealth from the fiat eCONomy.
This program is evidence that cute little Hope & Change has grown up to be Pandering & Mange
I have a couple of observations:
1. See the fine print and examples in the announcement. There is some kind of waiver of fees if the applicant chooses a 20 or 15 year amortization. So while you refi at a lower rate, your monthly payment does not go down and the "stimulative effect" is moot. What you are doing is paying the original principal down more quickly, which arguably benefits the bank and the borrower. I think the goal will be to push people into this arrangment wherever possible.
2. I think is it is not a subterfuge to clean up the documents. Fannie and Freddie were a finely oiled machine - documentation wise - before the housing boom and blowup and I think the document problems are located almost exclusively inside the private MBSs that were never sold to the GSEs.
3. This program is very limited. It will barely move the needle.
I thought Fannie and Freddie sold MBSes, not purchased them, but instead purchased the individual mortgages to create the MBSes?
Good point on #1. I believe the purpose of this refi program is not so much to lower payments as it is to incentivize people to pay down their principal faster, thus helping the GSEs. Fair enough, it is their risk. So essentially they are taking money from the MBS holders of the world and redirecting it to pay down the debt they have guaranteed
Ditto on point # 1. The stimulative effect is at or near zero with a shortening of amortization.
That said, how many pre-qualified morons would refinance a 150%+ LTV loan ?? How many banks would write such a loan without a taxpayer backstop ?? The whole scheme stinks worse than Moammar rotting away in the freezer.
Timely warning. It certainly seems that way. There cannot be smoke without fire, as the saying goes, and lately there's been a lot of smoke. i believe the worrying signs of slow-down from Europe and China has prompted the FED chairman to bring forward his QE timetable. Critical now are the CPI numbers.
Really good video last night on how the Mega Refinance is really a pea shooter!
http://www.pbs.org/newshour/bb/business/july-dec11/foreclosures_10-24.html
STAY AWAY FROM THIS......STAY IN YOUR HOUSE AND FIGHT THE BANKS FRAUD
Obama, the homeowner is not buying what you are selling....this does not benefit the homeowner or the economy ..they are on to you and your lies.......
Using the same tools that got us into this mess will not work. The RE/credit boom is dead for the foreseable future which means house asset increases financing consumer spending is also dead. Credit card and college loans have also run its coarse. The only bright spot is auto sales increases, but it is a result of lax loan policies fostered by Detroit and Feds. Besides cars hold their value on a depreciated bases and can be repossed a lot easier than a house. Bottomline is consumer is toast with very little chance for job creation. Stock market is next reflecting this reality, barring another Keynesian miracle in US or Europe.
bruce you are the best! great substance filled post. the devil is always in the details.
however just because youre coclusionnis that this program is messy. rest assured it is a well orchestrated can kicking exercise and just the right quality and quantity of dollar and borrower specific term weighted loans applications will be accepted for refinancing.
behind closed doors there is always a simple few rules of thumb or sometimes even a bulletpoint guide for the low level admimistrators to follow in order to push through the institutional directive.
if we saw how mers streamlined financial fraud this too is just another streamlimed operation dealing in half truths and offering pretenses of helping people while funneling farther along to cooperate with the finacial poltical system
A big part of this revamped plan is purely psychological. If you're at 150% LTV and you take part in this plan, aren't you sort of re-committing to staying in your home for the long haul?
The biggest question not yet answered is whether this Refi changes the loan from a Non-recourse to a Recourse?
Why would ANYONE refi and roll the dice on being a debt slave the rest of their life if they can just wallk away now?
In Nevada, it might do the opposite since it is now a nonrecourse state, after 2009
thats exactly what they are trying to pull.
Why would anyone role the dice? Most don't understand the issue, and that part of the various frauds doesn't come up in disclosures at closing.
In general, state laws are controlling. In Florida, and probably many other states, non-recourse applies only to purchase money transactions, so yes, the borrower is screwed.
Bad news is even if the US solidifies the real estate situation, it will do nothing to fix the issues with the economy. More like a band aid. So many people focus on this area but ignore the real issue. New production.
More patently deflationary policies from the geniuses at the top. Starve the good assets (premium mortgages) to prop up the bad (home prices). None of it has worked, so keep doing it. Insanity.
So, near zero macro-economic benefit but some marginal wealth transfer (maybe later substantial wealth transfer if this turns out to be a stepping stone toward debt forgivness) and a few bones thrown to the lawyers and big banks. Oh, and the message that the government is still very committed to manipulating the price of risk.
In other words, a typical base hit for Obama.
I checked the Hot Searches on Google Trends this morning and HARP is #1, beating McRib by two spots.
Something beats out food, sex, or entertainment?!? Amazing...
"Something beats out food, sex, or entertainment?!? Amazing..."
Scary, sin't it? I think that the McRib qualifies for all three too!
Very underwhelming indeed. Possibly a sideshow while a real plan continues to be hashed out behind the scenes?
Good for those it opens up refi's for, and definately a positive they are finally trying to fix HARP, but this a far cry from a game changer.
The FHFA is actually waiving prior Representations and Warranties made by the borrower and the originator of the loan.
This is a rape of the taxpayer two ways. The above condition is a blatant give-away/bribe to the banks. We know damn well what the quality of underwriting on those loans was. The banks should bear the losses for their crimes and negligence.
Also, the reduced interest income (from the worst debtors) will increase the losses of the FHA. Guess who gets stuck with that bill.
Impeach the illegal alien and arrest Bernanke.
Agreed. And it undercuts BK's assumption that this is NOT designed to clean up past paperwork messes. Waiving reps and warranties removes a giant turd from the mortgage punch bowl.
As others have noted, however, it does not fix the underlying problem because the fundamental problem is not the PRICE of credit but the QUANTITY of credit in relation to the willingness/ability of borrowers to repay, and of the collateral to support when they dont repay. Good luck w/that, Mr. President....you're going to need it.
When one refinances, it resets the interest clock so that the payments one makes are once again front loaded with money for the banks. How convenient!
Except that falling rates will kill them in the end, as they lose long-term revenue streams.
Which of course, is all part of the plan of turning banks into political entities instead of market entities. By the time this is all settled, there won't be a bank left that makes money off of anything other than front-running gov. operations.
Hell, they'll likely name the damn system after Marx.
Is it too early for a drink?