On the Mega ReFi Rumor

Last week there was a widespread rumor that Washington was thinking about a massive ReFi of home mortgages. I thought it was ridiculous. There may be more to it then I first considered.

The story version I was told was that 50% of the borrowers from Fannie and Freddie would get a letter that says, “We are lowering your rate to 4.5% fixed. Just sign and return”.

I have a bunch of problems with this. Economics and fairness come to mind. According to the Fed the 1-4 family mortgage market is $10.7T (this is where the problems are). Of that Fan and Fred have 4.6 T. The numbers:

If half of the GSE borrowers got the “Happy Letter” it would mean that on average 12mm households would get 1% off their loan. This comes to $23b a year or $1,900 per household. That sounds nice, but $23b is chump change these days. It is about $150 per month for the lucky winners. It really would not alter the course of what will come for the economy. Also in this equation must come the part that less interest paid to bondholders will have an offsetting negative impact on demand. Net net I saw no compelling upside to the economy in the rumor.

The plan as discussed would have been subject to a lot of criticism. The idea that only 12mm out of 50mm are eligible for the FF Lotto is a nonstarter in my opinion. You can’t win the Lotto because your mortgage is with a Community Bank? It gets worse. The criteria for eligibility would have to be based on payment history. If you paid your mortgage these past few years your pal Uncle Sam was going to give you a break. Translate this to mean that only those with higher incomes who did not suffer in the last few years would get this break. No Sale. The Administration would not like that result.

What bothered me is how broadly this issue was discussed. It was not a rumor; it was a “talking point”. It had legs and was even supported by the likes of Morgan Stanley. It made no sense to me. I have been asking around and got a different perspective from a few folks this afternoon.

One lady in Washington told me that I had the numbers all wrong. The plan is to:

- Include Freddie Mac’s $.9T in the program.
- The eligibility criteria would be based on payment history, but it would be set at levels such that 70% of all Federal borrowers would be eligible.
- The interest rate incentive would be substantial. The new rates would be below market. 4% is a possible target.

By the numbers this would put $60b back into households annually. So this adds up to a much bigger number. One that would help repair household balance sheets. It would imply that only 20mm out of 50mm would get a big win. It would mean that those owners that got clobbered the past few years, the renters, and the investors in mortgage securities would all get Dick’s hatband.

When I pointed this out she responded, “You don’t get it. This is not about the borrowers. This is about the lenders”. I said, “Huh?” Her take:

D.C. is worried about defaults. Strategic or otherwise. They are doing everything they can to hold it off. If the economy slows they will get hit hard on new defaults. This reality threatens everything. The objective of this plan is to ward off future defaults at the GSEs. The hitch on the 4% ReFi will be that if one fails to pay on a timely basis going forward the old rate is reapplied. That is a powerful incentive, even if you are underwater. At 4% your average house costs more to rent than own.

The “fairness” issue I thought was important, is in fact a non-issue. This is not a solution to the nations housing problems. Fairness is not the objective. It is a way to protect the GSEs. It is the equivalent of a CDS purchase by Treasury. They are paying the GSE borrowers not to default. From this perspective the Mega ReFi plan has better optics. It might even make some sense. But it is still a screwy idea. The fact that it is even being discussed (including some of the ulterior motives) is a measure of just how desperate the thinking has become.

A completely different take comes from a fellow I know on Wall Street. His thoughts:

PIMCO and Blackrock (the major managers of government assets etc) would never “allow” it.

The lady in Washington had this to say on that:

“To hell with the money managers.”