I wrote about the possibility of a mega mortgage ReFi by Fannie and Freddie (here and here). I (and many readers) pointed to an obvious flaw in the ReFi story. If a Trillion or so of mortgages were rapidly prepaid, then who would buy all of the new (much lower coupon) mortgage paper?
Now we have the answer. The Fed will put the new MBS paper back on its Balance Sheet, $ for $. There will still be many bondholders outside of the Fed who will get prepaid much faster than they had assumed. Most of that is in pension/bond funds. No one cares about them.
I think that Treasury will announce the plans for a Mega Refi in the not too distant future. It could come this weekend or next week. Obama will wait just enough time after the complex Fed decision so that 99% of all people don’t connect these two dots.
In that 1% will be Republicans. They are going to be mad as hens tonight that Bernanke ignored their last minute plea not to play more monetary games. The authors of that letter, McConnell, Boehner, Kyle and Cantor are really going to be peeved. Not only did the Fed step further on the gas, they greased the skids for an Administration's plan to ReFi mortgages.
It’s not at all clear that the Fed’s latest move are going to accomplish a thing. I’m not sure that the Big ReFi is going to be such a success either. But that doesn’t matter.
What’s important about this is that the Republicans will respond. They will not give Obama another leg up with his one-year stimulus program. Any chance of that went up in smoke with the Fed’s VERY political decision on MBS today. Can you say, "Collusion"?
This is a real circus now. In this one the bears aren't dancing. They’re fighting. The claws are out and it’s going to get bloody.
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don't understand Bears are fighting part..
ReplyDeleteThe key benefit of the re-fi plan is to extinguish the put back risk hanging over the banks.
ReplyDeleteThe notion that GOP (the party that socialized the debts of FNM and FRE in 2008) will do anything in the national interest is surely intended as sarcastic.
Anonymous, get your facts straight. The GOP has not controlled Congress since the end of 2005.
ReplyDeleteStanley, I think its an extension of the circus metaphor, but I was confused as well, with my mind immediately jumping to the bears that mauled Wall St today.
Stanley,
ReplyDeleteDancing Bears? A circus? The bears fighting?
To be honest I looked at images of fighting. The bears caught my attention. I liked the movement that is in the picture from the flying water spray.
So I wrote the last sentences so it would fit the picture. Sorry for the confusion.
You really can't see Bernanke in a ring against Boehner? Fur flying, roaring, fangs out, paws swinging. I can see it.
It is happening as I write, The Republicans just voted against the continuing resolution. That means the government must shut down on 9/30.
The vote today was the first shot of retaliation by Republicans. They will shoot more bullets. The fur will fly.
Bruce,
ReplyDeleteWhat is your understanding of how this Refi would work with community bank 2nds/HELOCs and also the F/F local mortgage limits?
For example, in my area the conforming limit is $417,000. People work around this by taking out 2nds/HELOCs with their local bank when building or buying a home.
So if someone has, say, a $350K first and a $200K 2nd on a hiouse that is now worth $450K, are they planning to combine the two into a new first that exceeds the max , or force the community bank to subordinate the 2nd and only refi the first (limited benefit to Homeowner as they can do that anyway) or write down a portion of the 2nd, etc...
From what I have seen, a great majority of the underwater mortgages are actually the 2nds, not the first mortgages..
G'day Bruce,
ReplyDeleteI don't have the expertise but you might. I would love to see an article/analysis about the following;
1. How the Fed is losing relevance and how this is a dangerous scenario. History shows that governments take increasingly reckless and desperate actions in a futile attempt to recover lost credibility/situations. I can see these reckless and more deadly actions now being only one or two steps away - true kamikaze style.
2. The second and truly shocking problem with this now is of course the elephant in the room of the Fed's balance sheet of nuclear toxic waste - $4 trillion that has little or no value and has now become IMPOSSIBLE to unwind.
There are no longer enough solvent governments and/or banks on earth that can facilitate the unwinding of the this putrid and worthless balance sheet.
So what we are left with now is an impossible to solve $4 trillion global problem. Because it cannot be unwound any longer then the debt must be written off - and of course this will vaporize world markets in a heartbeat and will undoubtedly bring on an extended global depression.
What Bernanke has done by trying to solve this problem has created an epic financial neutron bomb of unimaginable size.
As I said, the outcome can only be the dis-integration of the federal Reserve, which is now a given I believe. The other consequences are global depression and finally the withering of the United States from the global super power to pack rat.
Once the outcomes of Ben Bernanke's actions become apparent the world will be changed forever and much for the worse. His actions are a multi-generational nightmare.
Anyway I'd love to see an article on the Fed's balance sheet - it is certain cause of a coming economic apocalypse and no one is daring to cover it.
Unfortunately, there is no other possible outcome now that it has become impossible to unwind.
Bernanke has effectively become the greatest rogue trader in history who gambled with the future of the planet, and lost - big.
Regards
Don Brunone,
ReplyDeleteThe debts of FNM and FRE were NEVER EVER obligations of the US government. Every offering, prospectus, indenture so stated, often in big red letters.
George W. Bush seized both institutions and made their debts the debts of the U. S. taxpayer.
The GOP=TeaParty that says you should die if you can't afford a decent criminal lawyer or can't afford health insurance certainly had no problems with moral hazards in that wonderful summer of 2008.
In Calif 25% underwater homeowner still making payments is the exception on the coast anyway. For example recently made an offer on a short sale in the Bay Area for a home that sold for 530K in 2007, probably a no down loan, now its worth between 225K and 275K depending on comps. So at least 50% from peak. Lots of this around here!!!!
ReplyDeleteAnon at 3:16.
ReplyDeleteIf your limit is 417k then this would be a hard limit to exceed. I think this program will target around $250k.
On the HELOC/Second. If this debt was incurred from 2005 onward (maybe earlier) it will have to be resolved. The seconds are trading at 20 cents on the dollar. There is a very high expectation of a settlement.
I think the seconds are going to get reduced by 50-80%. The remaining amount will get rolled into a new loan.
Now comes the question of where you have a mortgage. If, in fact, it is still with your local bank you're screwed. Only loans that are currently owned by Fannie and Freddie and FHA will be eligible.
Good luck,
b
Anon @ 3:46. I will write that article on the Fed BS. Just not sure when.
ReplyDeleteAnon @4:47. You are so right. There was never a guarantee on this. As you say it was right in the indenture for every Agency Bond offering. It still is.
What a complete balls up mess...
Ron in Cali.
ReplyDeleteIn the areas hardest hit Cali, Ar,Nev, Fla the only solution is to walk. It is not possible to recover a 50% loss.
But there are plenty of folks (5-7mm) by my count) who have a mortgage from 2002 and earlier. These people are not so bad underwater. So they will not walk. The are much more likely to pay the monthly bill if the rate is re-set at 3.75%.
Anon @ 4:47:
ReplyDeleteAs I keep posting here and elsewhere, FNM and FRE are still NOT obligations of the Federal Government. A (Democratic) Congress passed in 2008 passed the Housing and Economic Recovery Act (HERA) allowing the Treasury if needed to support FRE and FNM; the (Republican) Bush administration put them into conservatorship rather than allowing them to fail at the height of the crisis; and the (Democratic) Obama administration maximised the support to the fullest extent allowed by HERA, basically providing up to a net $400 billion (or is it now unlimited? I'm not sure) to keep them solvent through the end of 2012. Both the Democratic and Republican Parties deserve credit/blame for this approach; the Tea Party supporters are probably the only ones who would have preferred to let Fannie and Freddie fail and their bondholders lose money rather than provide this support.
There are 4 levels of federal government obligations, ranging from the strongest to fulfill, Explicit Liabilities, such as Publicly held debt down to the lowest level, the weakest obligation to fulfill, Exposures implied by current policies or the public's expectations about the role of government.
ReplyDeleteIncluded in this list are debt held by government accounts, future Social Security and Medicare payments, And Government Sponsored Enterprises, such as Fannie Mae and Freddie Mac.
http://www.gao.gov/new.items/d04485sp.pdf.
Don Levit
Bad idea to use GSEs to refi negative equity property, it is gonna release lenders from representations and warranties putbacks.
ReplyDeleteActually, the math is simpler. Houses went into a bubble created by Greenspan’s interest rate policies, and banks had loose or no loan standards. The inflated home values went down 50%. Most of this “paper” was at the banks. “Re-fi” is another way to help banks; this is not about helping the American people, but the banks. Remember Rule One: The Fed serves the banks. Rules Two and Three: The Fed serves the banks. If you can remember these three rules, the math will be simpler.
ReplyDeleteYou can find 4 amounts of federal government obligations, starting from the best to fulfill, Very revealing Obligations, including Widely placed debts right down to the lowest level, the particular the most fragile requirement to satisfy, Exposures intended by existing guidelines or even the public's expectations about the part of govt.
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