About the Author
Patrick Pulatie is the CEO of LFI Analytics. He can be reached at 925-522-0371, or 925-238-1221 for further information. www.LFI-Analytics.com, patrick@lfi-analytics.com.
In the President’s speech to Congress on Thursday, Sep 8, he referenced a new program that he would initiate to assist homeowners with their housing woes. Details of the proposal have not been released, but it is known that a draft of a proposal has been circulating in Washington. (The draft is by Alan Boyce, Glen Hubbard and Chris Mayer. Boyce is CEO of the Absalon Project; Hubbard is Dean and Russell Carson Professor of Finance and Economics at Columbia Business School; Mayer is Paul Milstein Professor of Real Estate, Finance and Economics at Columbia Business School and Visiting Scholar at the Federal Reserve Bank of New York.)
Overview from Report
- 75% of all GSE loans have an interest rate of 5% or greater. Current rates are in the low 4’s. The plan is to refinance these loans to lower rates, reducing monthly payments, and providing the homeowner additional cash to spend in the economy.
- Homeowners are unable to refinance due to “Falling Home Values”, Low Appraisals, and Financing Costs. With this program, a homeowner can refinance underwater homes to any loan to value, provide no income documentation, and a complete disregard for credit scores, provided that the borrower is up to date on the mortgage and has been so for three months.
- Only First Mortgage debt eligible. Second Mortgages cannot be refinanced into the new mortgage. Any second mortgage must be re-subordinated as a second mortgage.
- New MBS would be issued for the refinances. They would trade between 3.2 and 3.4% yields.
- New guarantee fee of 40 basis points to compensate the GSEs for their costs of implementing this plan, for any possible revenue lost by giving up some “reps and warranties rights,” and for the loss in value of their retained portfolio.
- The refinance program would only benefit loans held by Fannie, Freddie, VA, and FHA. However, the report does say that non GSE loans that met GSE requirements at origination could be eligible.
Inherent problems with this plan
Numerous problems exist with this plan, if it is the one that the White House appears to be considering.
- The homeowners being considered for this program are NOT in default. They are paying their mortgages. They are being “rewarded” for meeting their financial obligations.
- If a homeowner is in trouble financially but not in default, a 1% reduction in the interest rate will result in a monthly payment reduction of $119.
- Income and debt ratios are being ignored for loan approval, though debt ratios and income are key elements for a borrower being able to repay a loan. If the housing payment is reduced by an insignificant amount, but the homeowner still has significant consumer debt, loan repayment is seriously jeopardized. Just lowering a monthly payment means little in and of itself.
- Loan to value is being ignored. The assumption is being made that by reducing the monthly payment, loan to value is a “side issue” of little importance. Yet, the higher the Loan to Value, the greater the likelihood of default, especially for 125% and above loan to values. (FHA loans from 95% to 97.5% loan to value have a 16% greater risk of default than those under 95%. Imagine the default risk percentage of 125% or greater.)
- Credit is not being considered. All a borrower needs to be is current on his home for three months. This allows any person with bad credit to refinance, no matter what their financial condition is. A borrower could have been in default four months previously, borrowed money from family to get caught up, made three months payments, refinance, and then start missing payments again.
- Mortgage Backed Security Investors will be having loans “retired” with greater rates of returns than the new securities. If they purchase these loans at 3.12 – 3.14 projected yields, the risk level will be greater than the expected returns. The only way that an Investor would buy these loans are because of the implied Federal Guarantee of Fannie and Freddie.
- 125% loans would be sold to TBA MBS whereby the exact conditions of the loans would be known. This may limit the pool of investors. An investor would not want to buy such loans with the elevated risk.
- If there is a second mortgage on the property, the holder of the second mortgage must agree to “subordinate” into second place again. The assumption is that by lowering the monthly payment on the first mortgage, the second mortgage would be in a more secure position, due to the lower payment. This program seeks to ensure their cooperation by force – “either subordinate or we will never do business with you again”. Since seconds are held by banks, etc., this would be a very powerful “incentive”.
- Homeowners delinquent on their mortgages would not be eligible. At this time, there are 6.8 million such homeowners. They are left with nothing but HAMP to turn to. We have seen how successful this is.
-
Private Mortgage Insurers are being “asked” to reinsure these new mortgages, when such insurance existed previously. The loans were insured when the Loan to Value was from 80% to 95%. Now, the homes will be underwater. But according to the authors, since the monthly payment has been reduced, default risk has lessened, even taking into account the lack of equity in the loan.
A Mortgage Insurer would have no incentive to insure a loan whereby there had been no credible underwriting, unless the government threatens to no longer do business with them.
- Fannie and Freddie will earn increased basis points from their current 12.5% – .25%. The new fee would be .40 basis points.
- If at some point in time, if the program was “opened up” to non GSE loans that met GSE guidelines at the time of origination, that would mean the GSE’s could refinance the loans and resultant government guarantees.
The Real Objectives and Outcomes
As with any new government program, we must look beyond the obvious to determine what the real objectives and outcomes of a program are. With this program, we don’t have to look far, because some objectives are readily admitted.
- The report estimates that mortgage payments will fall by about $70 – $80 billion.. What this really means is that it is being undertaken as a “new stimulus” for the economy, under the disguise of mortgage refinancing.
- Attempt to stabilize home values by refinancing to lower rates to keep people in homes. Finance underwater loans to avoid default. This will fail.
- Make the GSE’s more profitable through increased fees. GSE’s receive upfront cash flow from $54b – $72b. Allow the GSE’s to control more of the housing market.
- Bondholders to pay bulk of the costs of the program. Nearly all gains to homeowners come at the expense of the bondholders. (Total bondholder costs not given.)
In the end, this program will have little or no effect upon solving the housing crisis. It does not address the core issues of the crisis, which is a lack of real income growth in the US, excessively inflated home values, people who cannot afford the homes that they have now, those who cannot afford to buy a home at today’s prices, or the lack of private investors in the housing market.
Instead, the authors offer meaningless “solutions”. Homeowners who are not in financial trouble are offered the ability to refinance underwater loans at the expense of bondholders. The GSE’s, instead of being wound down, are allowed to further entrench themselves into the housing market. No attempt is made to entice private investors to return to home lending.
This is simply another “stimulus package” ready to fail.
i disagree with the author; if the borrower is paying, and the loan will still stay with fannie/freddie, a lower rate and pmt will aid his budget and help him stay in the home, it just makes sense.
If the existing loan has been on the book for a year or more then the resulting extension of the term will further reduce the payment, but the author’s point about the existing bondholders losing to the same extent the homeowners are winning is correct. No net gain to the economy, just a pre-election hand out.
The only thing that will actually stabilize the market is Principal Balance Reductions which won’t happen as long as the lenders think that the government is going to bail them out.
MM9,
A 1% reduction in a $200k loan means $119 per month savings. This is of little benefit to homeowners who are buried in debt and at risk. Especially so when you consider that most of this savings will be eaten up in higher costs for fuel, utilities, and food.
Also, the two key factors for default are an ability to repay a loan, as well as loan to value. For FHA, there is a 16% greater likelihood of default for ltv’s from 95% to 97.5%.
Once a loan goes above 125% the risk of default is 50%. That is because even those who can repay have no reason to keep a home that will remain underwater for at least two decades, and likely much more.
What about the people who would be buying the F&F bonds? Why would they want to buy bonds with high default risks, especially when they are only receiving a 3.12% – 3.14% return on investment? They would be fools to fall for that.
The problem that most people have is that they consider the actions of a program as a single action, and do not look at the overall picture. it is not possible to take an action and ignore all associated factors.
First, it wasn’t that people bought houses they could not afford, we, the mortgage banking community told them they could afford them by approving their loans to feed the MBS monster we created. Second, if we already have a loan at 125% or hell, even 250% LTV then a lower monthly payment lowers not increases the default risk. We are decreasing the payment not increasing the LTV. And by the way, check your math on the savings of a 1% reduction on a $200K loan. But regardless of the monthly savings amount, most of it will go right back into the economy. With rates this low it will mean a likely longer shelf life for investors on loans that were already performing at the higher rates, which just might jump start the secondary market back to life again. Finally after all the bungling by two separate administrations this is the first sensible housing program since this whole foreseeable and preventable crisis began in 2007.
PC,
1. A 30 Year Fixed Rate, $200k mortgage has a monthly payment of
$1,073.64 5.% interest rate
$ 954.83 4.% interest rate
$ 119.81 Difference
So, I was right with my numbers.
2. Again, $119 is not going to make a difference to the stressed homeowner. If the homeowner has a decent financial situation, then it will lessen risk a bit, but for the financially strained, $119 means nothing.
You may equate the $119 as reducing the Debt to Income Ratio, and which it will do so. But, you need to look at beginning and ending ratios to determine any real effect. Even then, I have discovered a major flaw in Debt Ratio usage, and for lesser income borrowers, debt ratios can lead to false positives.
3. Loan to values of 125% or greater defaults have the loan to value as the primary reason for default, followed closely by income issues. Failure to address the 125% issue while reducing the payment will not result in people desiring to keep underwater homes.
4. You make a case that the program might restart securitization. This is a false assumption. Why would people want to buy bonds covered by loans with very high risk levels?
The reason that securitization is active except with a few offerings by Redwood Trust is that there is currently no ability to adequately determine the quality of the loans that would be present in any offering. Until the quality can be determined, a ratings agency cannot rate adequately, and an investor cannot determine whether the risk levels warrant purchase at a predetermined price.
At this time, I have developed one necessary piece of the puzzle to restart securitization. Other companies have different pieces being developed or already completed. I am now preparing a concept that will combine the products in a comprehensive report to resolve those issues of securitization.
Additionally, I am working on a paper to address the issues of loan assignments and show the need for an entity like MERS. The recording statutes in the country are different in all 50 states, and are hopelessly antiquated, especially when one looks at securitization issues. The statutes must be brought up to date and standardized across the country to further enable securitization.
As to the homeowners buying homes that they could not afford, you are correct in that the mortgage community bears responsibility, as well as realtors, lenders, the media, and the government. But the homeowners share in that responsibility also.
I must prepare for a court appearance today. So at this point, I must stop. I will check back later for responses.
Once again, a Govt. introduced plan simply takes a page from sub-prime lending. This time it’s the NO Doc, 125% LTV loan only enhanced by no need for a credit score. As pointed out, the only people who benefit from this are the homeowners who really don’t “need” it and the loan officers that get to keep doing refis. Oh Wait!!! That’s me. Thanks Obama!!! I’m still not voting for you. : )
It would ABSOLUTELY help! I am a mortgage broker and it would help about 40% of my previous clients who have 800 credit scores, 40% LTV’s, hundreds of thousands of dollars in the bank and just want to lower their rate but cannot because they are self employed (like me) and had a bad year or several and have a low adjusted gross income and cannot qualify off tax returns, yet are paying their mortgage without a misstep. These are no-brainer refi loans. I need this refi loan. My boyfriend needs this loan too who can’t go DURP or HASP because neither GSE claims ownership for his loan yet he is salaried & can qualify but his house is an LTV of around 95% yet he put 30% down when he bought it & his rate is 6.25%
Joan,
I am known for being “very blunt” and I shall be that way now.
You are talking about your former clients with 40% ltv’s and hundreds of thousands in the bank and just want to lower their rate, but can’t due to loss of income.
Why should they be “rewarded by lower rates” when they have all that money in the bank in reserves and can make their payments? Let them pay off the mortgage or pay it down.
As to your boyfriend, he doesn’t have a GSE loan, and he has only 5% equity left. Again, why should he be allowed to go with a program whereby the government will be “guaranteeing” his loan?
He bought or refinanced at the wrong time, and now the taxpayers are to take on his risk of default?
This program does nothing to resolve the real issues with housing. In fact, it only prolongs the agony for most people by propping up housing values and delaying the inevitable drop to come.
You ignore what such a program would do to the investors in housing. Investors would have their profitable bonds retired as the higher rate loans were paid off, and then would be faced with having to buy bonds with a 3.12% – 3.14% return yearly, with elevated levels of risk. Or they find other areas to invest their money. Do you really think that a bond investor would go for a 3.12% return on investment? And this is even with a guarantee from the government?
Nest, you ignore the fact that loans with equity between 0-5% default at a 16% rate. Loans with negative equity default at a much greater rate. 125% and above default at levels of 40% to 50%, depending upon what source is reporting.
Maybe your clients would be helped, but the majority of the people would not be helped. Nor the investors.
This program is not about relieving the stresses on the housing market. It is about nothing more than a Federal Stimulus package in disguise.
The problems inherent in the housing market and in the economy as a whole are too deep seated to be addressed with phony measures. The government practices “extend and pretend” with housing and the economy just like with the banks.
Instead of fixing the problems beginning with the federal debt and spending, the government attempts to engage in populist programs that serve no useful purpose except to make an “appearance” of doing something good. Just like with HAMP, HARP and the other programs.
The only people that will truly benefit from this program would be lenders and mortgage brokers.
Lenders would benefit from not having to worry about litigation from Reps and Warranties violations because the loans would be refinanced. Furthermore, they would receive fees for funding loans and selling them to Fannie and Freddie.
Mortgage brokers would benefit from the increased number of refinances and the fees that they could generate.
Meanwhile, investors and taxpayers would take the hit.
it is time for the government to quit pandering.
[...] minds are reading an article on Ml-Implode by Patrick Pulatie. Please consider Analysis of Obama’s Proposed Fannie/Freddie “Streamline Refi” Program. The Real Objectives and [...]
[...] minds are reading an article on Ml-Implode by Patrick Pulatie. Please consider Analysis of Obama’s Proposed Fannie/Freddie “Streamline Refi” Program. The Real Objectives and [...]
[...] minds are reading an article on Ml-Implode by Patrick Pulatie. Please consider Analysis of Obama’s Proposed Fannie/Freddie “Streamline Refi” Program. The Real Objectives and [...]
For the most part, I am not understanding the push to get everyone on the proverbial GSE “bus” , the same “bus” that has swerved off of every highway across the country and collided with the rest of us. At the same time, I see clearly how this transacts to take debt and shift it to “bond holders” (who are they? and at what cost?). If the folks holding mortgages are still the quality people that are responsible and have “A” paper status, then why this program for them, and why now? Because the shills at the helm need their vote next year. And some of that money being “saved” may go into re-election coffers, that’s why.
I agree that it mostly is a federal stimulus exercise. However, it will increase discretionary income, and that will be used in the marketplace. Furthermore, it forces a haircut that has long been avoided, due to lowered asset prices, on investors and financial institutions, instead of the backs of the ever decreasing middle class. I am for it.
Todd,
1. Discretionary income increase? Offset by an already occurred fuel and food price increase, and up to a 10% fall in real income over the past few years.
2. Hair Cut? Not at all. The loans are paid off using the actual loan balance. Investors do not get a haircut. Then, the Fed buys the new loans with all the default risk.
3. Where does the investor money go? To Wall Street for greater profits. Not back to MBS at a 3.12% return.
[...] minds are reading an article on Ml-Implode by Patrick Pulatie. Please consider Analysis of Obama’s Proposed Fannie/Freddie “Streamline Refi” Program. The Real Objectives and [...]
In the communities, homeowners were/are fed up with the government making the losers… winners. This plan FINALLY rewards the homeowner who has struggled and continued to make their payments. I just did a refi on my house and saved 300.00 a month. I have a friend that can’t because they have a Freddie Mac loan and their is no streamlining and their income has dropped. BUT they have NOT missed a single payment…ever in the 14 years of homeownership. They are still struggling and doing without but they pay their mortgage. A drop in their rate would give them an additional $360 a month…an answer to their prayers but the bank will not refi…that is sad. Freddie Mac needs to be streamlined.
Hi, i believe that i noticed you visited my web site so i got here to ?go back the favor?.I’m attempting to find issues to enhance my website!I assume its adequate to make use of some of your ideas!!
I’m really impressed with your writing talents and also with the layout in your weblog. Is that this a paid subject matter or did you modify it your self? Either way stay up the nice quality writing, it?s rare to look a nice weblog like this one these days..
Excellent beat ! I wish to apprentice even as you amend your site, how could i subscribe for a weblog website? The account helped me a applicable deal. I have been a little bit acquainted of this your broadcast offered vibrant transparent concept
I just like the helpful info you provide on your articles. I’ll bookmark your blog and take a look at once more here regularly. I am moderately sure I’ll be informed plenty of new stuff right here! Good luck for the following!
It is actually a nice and helpful piece of info. I’m glad that you just shared this helpful information with us. Please keep us informed like this. Thank you for sharing.
Somebody essentially lend a hand to make significantly articles I’d state. This is the very first time I frequented your web page and to this point? I amazed with the research you made to make this particular submit extraordinary. Fantastic task!
Wonderful beat ! I wish to apprentice even as you amend your site, how could i subscribe for a weblog site? The account aided me a applicable deal. I have been tiny bit acquainted of this your broadcast provided vibrant clear concept
I totally disagree with this author. His head is not in reality. I have been current with my loan but it has been very hard. I should be rewarded for still playing by the rules and not walking away from my home like so many others. Our home does not have enough equity to refinance, yet we are employed and have good credit. Times are tough and a reduced payment would so help our family. And, we would be able to pay down other consumer debt if my mortgage payment could get reduced. So, yes, this plan would help lots of people, finally something for the middle class.
I in addition to my guys happened to be checking out the nice pointers found on the blog while immediately came up with a horrible feeling I had not thanked the blog owner for those tips. Most of the young boys are actually certainly warmed to read all of them and have certainly been taking advantage of these things. We appreciate you turning out to be well considerate and then for pick out certain awesome tips millions of individuals are really wanting to learn about. Our own honest regret for not expressing appreciation to earlier.