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Obama Bluffs on ReFi?
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In his State of the Union speech, the President said:
I found this interesting, and can’t wait to see the legislation that the Prez is going to offer up.
I have written four articles on the topic of a Mega ReFi (here, here, here and here). The first one was back in August. At first I thought there might be something behind all this talk. Now, five months later, I think it's all gas. We’re not going to see any big ReFi plan until after the next election. These are the issues as I see it:
The Administration has been trying to come up with programs that would aid underwater homeowners. This problem is, by far, the biggest domestic drag on the economy. So it makes sense that the Obama team is looking for ways to deal with it. There is one enormous impediment that they face in achieving this lofty objective. They don’t have the money to fill this very big bucket. If they tried to pass a bill that would raise the odd $200-300 billion needed, they'd fall flat on their face.
The Administration's thinking has been that underwater borrowers should get the benefit of today’s lower interest rates, and it should not matter if the borrowers are underwater by 25% or more. The White House would like the unrealized losses to be rolled over at a low enough interest rate to let those borrowers dig their way out of the negative equity hole in five or ten years.
To achieve all this, the President’s men leaned hard on the one guy who had to sign off on the plan. The President had to ask the permission of Edward DeMarco, the Acting Director of FHFA. DeMarco is ultimately responsible for what happens with our dear friends, Fannie Mae and Freddie Mac.
I have followed DeMarco’s words since he was appointed Acting Director. He repeats the same thing every time he has a chance to describe the goal of his job:
As FHFA has noted on numerous occasions, with taxpayers providing the capital supporting the Enterprises’ operations, this “preserve and conserve” mandate directs us to minimize losses on behalf of taxpayers.
In my opinion DeMarco has lived up to that. He has taken steps that have reduced the risks and the ultimate costs that the taxpayers face with Fannie and Freddie (F/F) . It’s for that same reason that he has not allowed F/F to be the agencies of the Administration’s economic plans.
These plans would force F/F to reduce interest rates on outstanding mortgages. As some of those mortgages are in inventory at F/F, the ReFi will result in additional losses. More importantly, the ReFi’s will require a waiver of many existing representations, and warranties of existing borrowers. In the end, there would have been a cost to all of this. The plan was for F/F to absorb the costs over time, and therefore kick the can down the road. (Why the President said there would be no cost)
DeMarco has nixed those plans. I’m amazed by this. DeMarco has been beaten up by the likes of Elijal Cummings (the new wanna-be Barney Frank of housing, ....only in America…)
The President can send powerful forces wherever he likes.
He has very tough guys available to do the really hard jobs when needed.
But even the President can’t bend Ed DeMarco. The reason, I believe, is that Mr. DeMarco has “protection”.
A year ago, the Administration tried to junk DeMarco. It wanted its own guy in charge of the old Agencies. It wanted Ed out of the way so that they could conduct economic policy (quietly) using F/F's $6 trillion of power.
I thought the appointment was a shoo-in at the time. That was not the case. The appointment was squashed by one of the strongest hands in D.C. - Senator Richard Shelby (R. Al) put his thumbs down. Without Shelby's support in the Senate, no appointment was going through. So DeMarco kept his job, and the Administration's plans got checked by powerful forces. The question is, “Is this check mate?”
The legislation that the President promised in his SOTU address can’t be a rehash of what was previously tried with Fannie and Freddie. That door is closed, at least until the next election. Therefore, I anticipate that the President will attempt to use the other big D.C. player in the mortgage business, the Federal Housing Authority (FHA). This entity could, in theory, be used to achieve Obama’s objectives. It could guarantee the payment of the new mortgages that would be required. In the process, it would transfer risk (both credit and interest rate) from F/F to FHA. That would make DeMarco happy.
While this plan is a possibility, it will never happen. The FHA is already in financial jeopardy (link). It needs a capital injection into its reserve fund for the existing book of business ($1T).
FHA would need a very big slug of additional capital to handle the ReFis that the President wants. (There are approximately 10mm homeowners, all underwater who would be eligible.) There is no way in hell that the FHA could get that much money this year. To do so would require the blessings of Senator Shelby. He has already tipped his hand; he won't back off in 2012.
I think we will see some legislation on this from the WH. It will get talked about on TV, but it’s dead on arrival. The President will claim that he tried, and he will blame Republicans for the failed effort. I wonder if the upcoming failed effort is not a "planned failure". One that has been put "out there" purely for the political theater that will come with it.
President Clinton abused used F/F. He wanted the Agencies to be an engine of his social objectives. Bush also abused used F/F. He wanted F/F to be an economic engine while the country was at war. Obama also would like to use abuse F/F. He's trying to trump what the last two Presidents did. He wants F/F to be the vehicle (and the loss generator) for a big ReFi plan, and he wants to use the Agencies to push his social agenda. I'm amazed that after all of the history with the Agencies that this Administration is repeating the sins mistakes of the past.
Bully for Ed DeMarco for standing up on behalf of the folks that will foot this bill, the poor taxpayers.
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http://www.youtube.com/watch?v=UIjoW_IXos4
Shelby is a Republican? Oh yeah, forgot he was one of those mid-90's 'converts' that switched over after the 1994 elections.........
trying to plug the last hole in the blowup doll that is the economy with duct tape . which is now all duct tape. nothing undernieth. gangbangers they are
No. The Administration has been trying to come up with Populist claptrap to fool the chumps into re-electing the Great Zero. Otherwise the march from Socialism to Fascism via the Democratic Central Planning into Utopia will not be realized as yet.
As with all things Progressive, it must SOUND good, it need not actually work, i.e. The War on Poverty.
The words you are saying are having a sound like the words many stupids were saying when the president who is Obama was having many difficults trying to save the company that is General Motors who is now being the automaker who is being the number 1 in the world. But we should not be having so many cars to be adding to the world and we should not be having so many peoples who are living in houses with too much bigness for peoples having familys that are not being big enoygh to be needing such bignesses so who can be knowing what is good to be having and what is not good to be having. Too many peoples are thinking everything that is happening by the president who is Obama should be simple but that is how the stupids are mostly thinking.
Holy shit Geruda, that is a REALLY funny post!
I gave it a thumbs up for making my eyes involuntarily cross...lol.
A little tidbit about Sen. Richard Shelby. The office of federal housing enterprise oversight (OFHEO) sent a warning of systemic crisis in the housing markets to Richard Shelby and Michael Oxley in 2003 and 2004. Here are the links (one briefly describing the event, one the actual document on the OFHEO website).
http://gdaeman.blogspot.com/2007/03/ofheo-warning-of-february-2003.html
http://www.fhfa.gov/webfiles/1217/WEBsiteOFHEOREPtoCongress03.pdf
So the OFHEO director, Armando Falcon, was rewarded for his due diligence by the Bush administration with a prompt firing after the 2nd warning was sent to our oh-so-diligent-and-protecting-the-peoples-interest politicians and replacement in 2 days by a see-no-evil, hear-no-evil lackey,
Ahh. The web of deceit and financial treachery continues unabated. Would someone call out Oxley and Shelby in a public forum about this? ... oh yeah, i forgot that opporunity will never be allowed.
In most cases, the only weapon the underwater mortgagor has is default. Fortunately for the banks, default is their best weapon against refi at lower rates.
Here's an analogy.
A pharmaceutical company sells you an over priced life sustaining drug and takes out multiple life insurance policies on you.
Choice:
(a) You can pay to take the drug and continue living a somewhat value life.
(b) Stop taking the prescribed drug and risk premature death triggering multiple insurance payoffs to the pharmaceutical company.
(c) Take a generic version of the drug and live a higher quality life through cost benefits.
Option (a) is the status quo.
Option (b) is the most lucrative case for the drug company.
Option (c) may seem like the obvious choice but it is this option that our corrupt government wants to prevent.
If this was going on in our health system, there would be outrage so why is it allowed in finance? Point is, if you remove the ability of the bank to take our default insurance, there would be more of an incentive to renegotiate bad debts.
This refinance scheme is also going to be used for the banks to have a clear title so they can procede with foreclosure and do not have to worry about being sued anymore. Robo signing got them where they are today this will remedy this situation for most banks. Walla all state AG's will no longer have a case.
"all state AG's will no longer have a case"
I doubt it. Remember that the State of California (for example) wants billions of dollars in damages and punitive damages for lost recordation fees from title reassignments going all the way back to the mid-1990's, when MERS was new. None of that goes away just because a new loan gives the bank a clear chain of title.
You're right that a refi would get rid of a problematic loan. But, only a handful of people will qualify. There will still be plenty of old mortgages out there, GCT.
if thats the case, and im not saying its not the case, than why didnt they do this right away in 2008 when everyone was still asleep and not allow the moral hazard to spread everywhere and now they are dealing with a problem 100X worse ???????
Obama doesn't care about the social agenda anymore than Bush cared about the Home Ownership Society. Economists have long promoted the Home REFI ATM as a way to boost spending (Greenspan primarily) and every POTUS has been onboard since. Shelby comes off as the bad guy here, but the pattern in these matters is that the GOP will often give the money directly to taxpayers (if they get some political benefit) rather than create these convulted schemes in which banks and loan originators and all sorts of real estate pond scum gets to drink upstream. to return to the Maestro, he was singing the praises of a flexible home lending system while the market was going up, but just try and leave that flexibility in the system when things turn around and everyone screams murder, and bailout.
If the real estate lending system would have been left in place, secondary and tertiary lenders, when the market turned, the weak hands would have been shaken out, the good paper would have passed back to the banks (strong hands), and the bad paper would have been written off. now a lot of people are underwater who really shouldn't be... (yes this is repetition of the facts, but in a slightly different context) and yes Obama has done nothing but shovel more shit on the pile.
but the opportunity to do the right thing came and went, now the banks with the feds blessing will be going after home equity which is worth at least half the value of the mortgage, and definitely half the face value. someday corporations will be the only people allowed to own homes.
Zero down houses are still being handed out; they combine the FHA 3.5% down with other laons and voila!....zero down.
Until this mania passes any real recovery is years away. By real recovery I mean an RE market that is not continuing to plunge. Right now I agree with Shiller's pessimistic view of a decade of falling RE prices.
Sold our house in Texas one year ago. Was shocked at closing to see that the young couple in their 20's purchased it with 1.5% down and gave us asking price, no negoti!!! WTF?? I naively thought those days were over. It was an FHA loan. I'm sure that teeny bit of equity they started out with has long since evaporated and they are underwater. I was glad to be rid of the house, but almost felt bad for the couple that bought it. Fucking sheep cant see the shears coming right at them.
Barry is a dithering dilettante. When faced with hard decisions in his first 2 years, he elected to reward Goldman and their ilk.
If he gets back in, it will be by default; despite his drifting, confused nature.
A number of condo/townhouse associations won't allow FHA financing for a purchase or refinance because of the "baggage" attached to the transaction and people asking for the loan.
The bad loans have already been shovelled over to Fannie/Freddie and onto the taxpayers; and they can always shovel more over into that dark pool as it has been "nationalized". Anything but make the banks suffer the consequences for making bad loans in the first place, the poor dears.
Definitely a political bluff by Obama in an election year to garner votes.
The only sound system is 20% down so the borrower has some skin in the game and the originating bank holding the loan for the life of the loan. This, however, would negate buying votes on the behalf of politicians and fees and kickbacks and CDS's and MBS's for the bankers to line their pockets.
The banks may get some blame, but under Clinton, his wonderful AG and the HUD Secretary told the banks that if they didn't lend to these poor customers, the Fed Govt would be all over them under the law passed under Carter to prevent Red Lining. Banks could loose charters essentially going out of business. The Fed Gov then told the banks that F/F would buy these mortgages so the banks didn't have to hold the mortgages.
This is still being repeated. I don't beleive most of the politicians could pass simple math anymore.
Agreed.
However, the banks took that ball and ran with it.
Using the government hegemony as an excuse, they made bad loan after bad loan, bringing in transaction fees hand over fist, selling MBS's, and finally defaulting on the bad loans and shoveling them onto the taxpayers back via the bailouts, Fannie/Freddie, etc.
We are still paying for their skullduggery.
Politicians win, Bankers win, The People lose.
Blaming the less educated consumer is blaming the kid instead of the pusher and the cop taking a payoff to look the other way.
it always comes back to .......deflation OR hyperinflation.......4 years later and still no one knows
Oh it was very well known that the crashing of an over leveraged housing market would literally destroy money and bring about deflation. It was the scale of defaults that evaporated the existing money supply and limited future "private" credit expansion.
For now, hedge both of these bets maybe even a small hedge for a New Orleans/Katrina style breakdown.
Good article Bruce!
First of all the FHA will never be a part of this mega refi plan, 1 they can't afford to as they get their income from monthly mi, 2 their rates are at 3.75 already and the FHA does streamlines that don't need an appraisal, so they are set up already for a mega refi...the problem is the mi is so high now there is no benefit for a new borrower to refi going from a rate of 5% to 3.75%
F&F are supposedly coming out with their harp 2.0 next month! Of course it all depends if the lenders are on board, there will be loan pricing adjustment fees for those that do not need an appraisal.
Also, it has to be noted that Obama already fucked all future homeowners by having F&F collect 50bps to pay for the 2 month payroll tax cut. It Will cost a homeowner an extra $10k over the life of a $400k loan.
Obama is a fucking sheister, talking out one part of his mouth and lying out the other!
Every and all housing programs put forth by the govt will fail to deliver and fail miserably!
The Refi proposal is just another scheme to fund the big banks.
A homeowner refi under this program will:
1) lock a borrower into the loan (and there may be fees for the banks) in an effort to prevent future foreclosures by these refi borrowers.
2) continue inflating the value of homes (even though the owed amount may go down a little, you have to give a little to gain alot)
3) minimize the bank's loss for the loan write down as the government will fund most of it.
4) get the banks off the hook for future litigation.
I think it sounds like a great deal for the banks.
"The Refi proposal is just another scheme to fund the big banks."-
No need to go any further, this says it all. More and more, when I want something done on my properties, I employ people under the table as there is far more transparency on the black markets these days. At this point, I think nothing short of some serious blood-letting by the banks will save them. When? Well exponential equations are a bitch, the question is, where on the curve are we? I believe Chris Martenson has some thoughts on this.
and of course "this is fear" which is where this article should be concentrated on...not on some "hopey/changey we're here to put money in you pocket before re-election." What the Adminstration DOESN'T want is "the failure of Bank America" going into the election. Thus...the proposals are made by "phucktard incorporated"...and swallowed hook, line and sinker by people "only interested in running for office." Too much complexity yet again...if BofA fails...and it is inevitlbe that it will completely collapse...that's the end for a huge chunk of the electorate and the Democratic Party. Worse still...this article simply doesn't understand even the concept of "economics." The theory that "an economy is housing" is such a pathetic joke it's really hard to tell if this is an actual and bad attempt at sacarsm rather than a serious attempt to get some actual solutions to the both 1. the total and permanent collapse of Wall Street and 2. the work around currently underway by the Fed, Treasury and the Pentagon. It's pretty simple: jobs, jobs, jobs, jobs, jobs.
Thanks Bruce.
I think you've about nailed it.
Nailed it? Yeah, except for this: "standing up for the folks that will foot this bill, the poor taxpayers."
Let's not kid ourselves. After millions of Americans were heedless/ignorant/brash/foolish enough to buy houses they should have known were overpriced (and which they really couldn't afford), ALL OF US are going to be stuck with the bill.
See, there's no way to erase a $7 trillion decline in real estate "wealth". Make the bankstards foot it? Impossible. They were destroyed by the first few hundred billion in losses--remember TARP? Behind those 10 million underwater mortgages are $trillions in mortgage derivatives now worth essentially nothing.
If we don't foot the bill as taxpayers, we'll foot it as consumers, via money printing/$5 gasoline/$10 ground beef. Everyone who lives outside the Wall Street/WashDC nexus will see their living standards tank.
1) The theme song for this presidency should be "President Gas," by the Psychadelic Furs.
2) The Banks etc were more or less intermediaries that passed through the savings and investments of millions of people and businesses ... forgiving the "under water" part is expropriation going by a kinder, gentler name, but expropriation nonetheless. Obama's demagoguery belies a simplistic view that the big, faceless banks will be made to pay to buy his votes. Then again, he has them by the short hairs in any case, so why not appeal to the masses?
Good reporting of a curious story -
Seems like factions among the US oligarchs are having their disagreements, about how to keep the big US economic Ponzi scheme going.
One faction tilting more toward the money-printing to pump up consumer spending by home-owners, the other faction thinking it's better to just let the former US middle class sink deeper into the debt morass.
The US oligarchs aren't sure themselves about what form of can-kicking is the most effective. European leaders certainly don't have an agreed plan on their mess either.
Perhaps I am wrong but what I read into Obama's commentary was that this will be paid for by some sort of levy on the large Financial Institutions which created this mess and got bailed out by the taxpayer. That would be a much more palitable approach but still smells of moral hazard. "Investments (Including housing) can go down as well as up"??
name one time when a government cared about banks? EVER? "Not unless they're made to" is simply understood here in Upstate New York...where banking reached Superpower Status from the 1880's all the way until the Great Depression. There is no..."banking" in the world today...nor had there been in decades. Only "government programs that must be funded." This everywhere and always includes..."real estate development" of which housing is a part...but just a part. Just go to Berlin and take a look around...it doesn't take a rocket scientist to draw the line directly to the "Great real-estate bubble known as Greece."
Jobs requires real growth, real growth requires energy, energy is finite, ergo so Are jobs. Unless of course you are in favor of "make work" jobs. Actually, a shortage of a number of other elements in the correct oxidation state is going to become problematic, as well as fresh water, long before energy becomes a problem. Know what the real value of your labor is? If so you have nothing to worry about.
- sent from my iPhone from a secure and well fortified position.
BGiB
Astute observations. A rewrite of the Immanuel Velikovsky 1960's book, When Oligarchs Collide.
Fixed it