If you had any doubt that the intent of policy, such as the heroic efforts by the Fed to channel money to the mortgage market my manipulating spreads of mortgage paper so as to lower borrowing costs, was not merely to clear inventory but boost prices, today’s action should put your mind at rest.
The powers that be have just put in a big time above market bid, now permitting refis of 125% LTV for borrowers who are current. That is, assuming they get any takers.
The effort is presumably to address borrowers who are already under water, and so would be swapping out of a mortgage that is in negative equity land for one that has a lower coupon. That lowers their payments (ex costs) and frees up some of the money formerly spent on the mortgage to spend on other stuff, like paying down their credit card debt (that was a lame attempt at humor, the authorities hope this will lead to more consumption). In addition, the new mortgage in theory is less prone to default than the old, since it consumes less of the borrowers’ income.
But theory may not map on to practice, First, in most states, a purchase money mortgage is non-recourse, but a refi is. So some borrowers will put themselves in worse shape it they take up this offer.
Second, defaults are more likely with negative equity loans, apart from payment stress. Why? Let’s face it, even if you make your payments, you still expect a big bill when you sell the house unless the market appreciates enough to enable you to sell it for your mortgage balance. The other exit is negotiating a short sale with the bank, but that still leaves the hapless seller with a large tax bill if prices fail to recover by the time the forgiveness window closes (2012?).
Lousy endgames leave buyers not highly motivated to work hard to make payments when adversity arises. They realize, correctly, that they are better off not throwing good money after bad.
But this program nevertheless suggest that the authorities sincerely believe that current price levels for housing are the result of panic, and not a return to historic relationships of housing prices to incomes and rental prices.
From CNBC (hat tip reader Marshall):
Homeowners refinancing their mortgages through loans backed by government agencies will be able to borrow up to 125 percent of their homes’ value under new regulations enacted Wednesday.
The rule changes, part of the government’s attempts to restore housing affordability and stem the foreclosure crisis, apply to loans backed up by Fannie Mae and Freddie Mac.
Yves here. Huh? This is beyond Orwell, it’s patently silly. “Housing affordability” has traditionally meant “let’s do things so people can afford to BUY houses.” It even once included stuff like Section 8 housing, giving tax breaks for rental housing targeted to lower income people. The intent is to prop up prices by keeping stressed borrowers from selling their houses and possibly also sending an information signal through the 125% figure, that housing really ought to be priced higher. That is anti affordability. And the concept of “affordability” to my knowledge has never before been extended to keeping homeowners in place. Back to the article:
Previously, homeowners could borrow up to 105 percent of their home’s value. The new loan-to-value ratio is set up at 125 percent in a further effort to address those mortgage holders who owe more than their homes are worth.
“By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly,” Treasury Secretary Timothy Geithner said in a statement….
The new LTV rate will be offered only to borrowers who are current on their mortgages that are owned by either Fannie or Freddie.
“This is a change that will put affordable refinancing opportunities within reach of performing borrowers who have suffered the effects of local home price erosion,” Freddie Mac Executive Vice President Don Bisenius said in a statement.
Home values in many markets have sunk by 18 percent in the last 12 months, according to Standard & Poor’s/Case Shiller home price index…..
In a separate move, the government is encouraging borrowers to take advantage of a chance to lower their mortgages from 30-year to 25-year in order to save on interest charges.
The government will reduce the processing fee for borrowers who take advantage of the 25-year option.
Update: Reader RueTheDay tells us that Housing Wire reports that only 6% of agency loans have LTVs between 105% and 125%. While this may seem small, Fannie and Freddie have such large books that even a small percent is a whole lotta mortgages. But the key unknown is the uptake rate, which could prove to be modest.
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Agree this is insane – one quibble, Section 8 is not a bygone, or maybe I should call my manager to see if my multi-family Sec 8 bldg is still with us….
Sorry, drafting is not clear. New Section 8 housing is not being built, which is why I put it in the past tense, but yes, you are of course correct, there are still many people enjoying Section 8 apartments.
That is, assuming they get any takers.
The government-centric mind will simply look at the small number of takers and say "See? I told you we should have gone to 150% LTV!"
That is anti affordability.
You are missing the important words.
The political goal for the last decade has been affordable MORTGAGES, not affordable HOUSES. Big difference.
The laughable part is lumping people with LTV's of 100% or above into statistics as "homeowners". Nope, they own NOTHING until they have a smidgen of equity. Until they have the slightest amount of equity, they are merely renters. If the value drops, your equity vanishes and you are now a renter rather than a (part) owner (liable for all the property taxes, too).
Not sure I understand the criticism in terms of the purpose of the program. The risk is already on the agencies' books. Refi'ing them into a more affordable mortgage very well may not work, but at the least it won't increase the risk profile of the loan at hand.
The RVI (reality volatility index) just went K1. Free up monies for what food or just more mindless consumption.
Skippy…pragmatisam is truly dead.
Dan,
I will admit I did not get into it in the post, but the mortgage rates now are hardly market rates. The Fed is buying mortgage paper hand over fist to suppress spreads, hence rates.
The old interest rate, or at least some unknown rate higher than the current Fred/Fan rates, is a better proxy for the real risk of mortgages.
And that is before we get into the interest rate outlook. The intent of policy clearly is to reflate. All mortgages issued now will be underwater, if nothing else due to the termination of Fed manipulation, even more so if (when) long bond rates rise further.
So buyers of this paper will sit on losses. And who are the buyers? Lets' see, pension funds, insurers, bond funds, the very same people who for reasons I fail to understand cannot be made to endure losses on bank bonds. So saving them from that horrid fate leads them to eating losses on mortgage paper down the road. This is a massive shell game.
If the borrower can make payments now, what is the justification for a refi? If they can't, or are under stress, this is just another example of the general mortgage mess, that our new streamlined highly efficient system is not set up to do deep principal mods, or much of anything on an individual basis.
Deep reductions in principal have a higher success rate than shallow mods, which is what this amounts to if a borrower is barely hanging on.
Those same ARMs that were recasting/resetting up when LIBOR was going through the roof have now come down quite a bit. Meanwhile, FRM rates have been heading higher.
From Bankrate today:
30 Year Fixed 5.39%
1 Year ARM 4.05%
3/1 ARM 5.19%
Tell me again how refinancing is going to help these folks?
If we're talking about people in Option-ARMs and other exotica, the reality is most of them will not be able to afford a fully amortized payment at ANY interest rate.
–RueTheDay
According to Housing Wire, only 6% of agency loans have LTVs between 105% and 125%.
http://www.housingwire.com/2009/06/29/prepays-drop-as-refi-pipeline-narrows/
This change in policy is not going to have much effect at all
–RueTheDay
"So buyers of this paper will sit on losses."
Since these are for Agency-backed loans, won't it be the taxpayers who ultimately eat the losses? Isn't that the point?
"The other exit is negotiating a short sale with the bank, but that still leaves the hapless seller with a large tax bill."
Unless they default before 2012. So they better be quick about it.
It's an interesting attempt to reflate the price of houses. While hoping for inflation to reduce the burden of debt, the US economy is still shrinking fast with rising unemployment. Unless China, Japan and the EU can afford to implement a Marshall plan for the US, the results of this policy is just buying more time. I think the ball is now on China's policy, and the US should be more open to Chinese bids on larger parts of the US domestic companies. The world is becoming more globalized than the US concept of globalization.
Only a truly cooperative attitude from the global economic elites may avert the collapse of the USD.
"The intent of policy clearly is to reflate."
I don't see how this helps homeowners or "renters" at all. It is just another scheme to reflate the housing market, and make banks' balance sheets look better. On the other hand, I don't see this as dumping a lot of crap debt on to the Fannie and Freddie because a homeowner would have to be both desperate and crazy to refinance on these terms.
The intent of the policy may not be to "reflate" but to bail out the lenders while appearing to bail out the mortgage holders. After all, a refinance of a privately issued underwater mortgage by a GSE is very similar to TARP version I, as it is allowing the mortgage holder to receive 100 cents on the dollar for a mortgage whose intrinsic value is much less than that.
That lowers their payments (ex costs) and frees up some of the money formerly spent on the mortgage to spend on other stuff, like paying down their credit card debt (that was a lame attempt at humor, the authorities hope this will lead to more consumption).
Your parenthetical made me giggle Yves, since it so sharply points out how desperate the government is to get people to start behaving recklessly with their finances again.
He must not be able to put the govmint card down for the rental of the helicopters.
Haliburton has a strict cash only policy now.
From bad to worse:
California Congressman Gary Miller has introduced H.R. 3044, which would place an 18-month moratorium on the recently imposed Home Valuation Code of Conduct (HVCC). The HVCC was worked out through an agreement between Fannie Mae, Freddie Mac, and the New York Attorney General’s Office (NYAG) in response to an investigation by the NYAG into Fannie and Freddie.
The purpose of the HVCC was to try and insulate the appraisal process from undue influences. The HVCC attempted to do this by placing tight controls and restrictions on the ordering of the appraiser, as well as purposes for communicating with the appraiser during the process. However, the implementation of the HVCC, which came about by neither regulation nor Congressional statute, has resulted in appraisals that cost more, take longer to perform, and are inaccurate. C.A.R. has heard from members throughout the state of similar difficulties with the HVCC and its negative impact on the California real estate transaction. C.A.R. is supporting H.R. 3044, and is asking California’s Congressional Delegation to sign onto the bill as a cosponsor."
I think you are overestimating the intelligence of the average consumer. These are the same people who get 6-7 year car loans. Lower payments = good deal to them.
The refi turns a non-recourse loan into a recourse loan, exposing the borrower and locking them in should housing prices not recover.
At 125% LTV, by refi'ing, the borrower immediately transfers a huge loss position from the bank onto themselves, exposing themselves not only to loss of home, but now to loss of additonal property!
A 105% LTV could be considered a help. A 125% LTV refi, from a consumer-protection point of view, is a completely hazardous instrument. It's outrageous the government is suggesting this as an option.
The more I think about it, the more evil I think it is the government is promoting this. The borrower is literally putting their other assets in hock for the right to service the part of the debt that the bank is currently liable for.
Take a house that's worth 100k with a purchase mortgage of 125k.
option a) Borrower walks. They lose their down payment. No more payments. Bank liable for 25k loss. They go rent something they can afford.
option b) Borrower refis. Now borrower is liable for bank's 25k loss and continues to pay interest on the loss until paid off. Should the borrower default at this point (likely, as this is still not a property they can afford), the bank can take the rest of their property too.
(I don't see walking away a moral issue. The banks wrote the loans clearly understanding non-recourse and priced the money accordingly.
With the roles reversed, banks consistently follow legal and not moral obligations.)
It makes me even more irritated that Freddie Mac wouldn't lend to us because of the location of our bathroom:
http://www.thenational.ae/article/20090617/BUSINESS/706179916/1137
What about mortgage insurance? Surely a 125 is going to need MI. With the MIs on life support, which one of them is going to dedicate capital to loans like these?
For those Freddie or Fannie owned loans with current LTV's up to 125 that are already insured by MI's, the MI's have agreed to continue their coverage. MI's will not insure refinances from previously un-insured loans into new loans with LTV >100.
From Freddie and Fannie perspective, they are modifying existing loans which would already subject them to loss, and slightly reducing the risk of future loss.
couple questions:
"only 6% of agency loans have LTVs between 105% and 125%."
that data – where is it from? it cant possibly be accurate – unless it only takes into account loans that may have been at that level when originated.
"…homeowner would have to be both desperate and crazy to refinance on these terms"
what are "these terms"? how do you know the terms? why are the terms less desirable than the homeowners current terms?
"So buyers of this paper will sit on losses."
isnt that the point – the gov't sits on the losses until they are no longer losses – because they have the deepest pockets and the longest time horizon, right?
"The refi turns a non-recourse loan into a recourse loan, exposing the borrower and locking them in should housing prices not recover. "
is that in all states? also, many of theses loans must already be recourse loans thanks to the cash out refi (better known as "what should have been wage gains") , so what's the difference? isn't it that the gov't now holds the note until it goes away – whenever that may be?
"What about mortgage insurance? "
i talk to wells fargo in april/may and was told that loans with pmi don't qualify for the program. is that true?
at the time i thought to myself how convenient for the banks to have that clause – nobody is going to use this program. – the people that need it will have pmi on their loans. (which by the way is the heart of the beast and needs to be slayed) and those that don't, probably dont need it.
FINANCIAL INSURANCE- what a joke and a scam. the only insurance is uncle sam's teat. what a bunch of wimps in finance. cant handle risk – so they pawn it off on others and reap all the rewards.
the only thing insured is the whole deal crashing down.
1) This only applies to loans Fannie and Freddie already hold the risk on. They're reducing payments to decrease incidence of default on loans already made. They're not writing new loans and they are not allowing it for properties/borrowers that have credit enhancements. Credit enhancements means there was something that was f-ed up like unverifiable income upon audit. Thus, they are only reducing payments/rates on people who are very likely to stop paying if they don't get a break.
2) Loans with MI are permitted provided the new loan amount is not approximately $4,000 or 4% more than current loan principal, whichever is lower.
They've thought pretty hard about this. The modification plans being put into effect are a pretty decent compromise as well. I would have gone for it to be weighted more towards some principal reduction, but I can see the argument against that. Their solution has to encompass the demands of being generally fair across the borrower spectrum, of getting to the immediate problem of nonpayment and yet, not totally bailing out those seeking relief.
It's not the wisdom of Solomon, but it's a workable plan.