On the (not so) Mega ReFi

Finally some details on a plan that has been whispered about for six weeks now. Actually, the information available begs some questions. Some thoughts on what was released from the FHFA yesterday:


- I’ve said from the start that the fatal flaw in the Refi program is that it only includes those who happen to have their mortgage held by Fannie and Freddie. About 40% of the mortgages that would otherwise qualify for a new deal are getting nothing.

This is the telephone number to determine if you are eligible: 800-7FANNIE. Four out of ten who call will be told to buzz off. The reason is that they got a mortgage from a Community Bank.

Obama is going to take credit for the refi program (he already has). But he’s also going to take a ton of flack from those who get left out in the rain.



- On the topic of fairness, there is one condition for eligibility that got me a laugh:

The current loan-to-value (LTV) ratio must be greater than 80%.

In other words, all “good” borrowers (LTV<80%) need not apply. To qualify for a new mortgage today one would have to put down a minimum of 20%. How does one characterize the refi? Subsidy comes to mind.


- In order to have a chance at a refi one must also:

*Have a clean payment history. (One late payment in the past 12 months is okay). There will be a waiver on any LTV (no need for appraisal).

*Have entered into the mortgage prior to May, 2009.

So there are a lot of hoops to jump through to take advantage of what has been offered.


- FHFA is very vague on their estimates of how many mortgages will be eligible. The guess is that it might be as high as 900,000 by the end of 2013. The program does not start until January 1, 2012. Thereafter the number would be about 37,000 a month.

What does that mean for the economy? The answer is not much; at least not for 2012 (Beyond that is anyone’s guess).

The average mortgage is $200,000. Assume that the savings from the refi is 1.5% and the closings commence in March of 2012. The result is that there is a monthly reduction in the mortgage payment of $333. By the end of 2012 there should be about 370,000 refi’s completed. That would put the full year total interest reduction at $680mm. ($540mm adjusted for taxes)

While this is clearly good news for those lucky enough to get the Refi, the $540mm is not a big number in our $15T economy. Obama’s (busted) Jobs Program was supposed to provide a stimulus of $435B. The economists who looked at it thought it might add 1.5% to total GDP. If the same logic is applied to the Refi program the benefit would have a stimulative effect of only 1/8% of GDP. Yawn.


- There is a question of how much interest savings can be achieved. As of today, the cheapest Refi for a new 30 yr mortgage would be ~4.25%. To achieve a net 1.5% savings, the old mortgages have to be 5.75% on average. This rings wrong to me. I think the average for those who are otherwise eligible is meaningfully lower than 5.75%. This suggests (to me) that the benefits will be muted.


- Many have written to me that the Refi is a plot to eliminate any prior flaws in the loan documentation. I don’t think so. But I’m not a lawyer. It’s best to check with your own counsel. The FHFA is actually waiving prior Representations and Warranties made by the borrower and the originator of the loan. From the FHFA:

Reps and warrants protect the Enterprises from losses on defective loans. FHFA has concluded that eliminating the reps and warrants will be good for borrowers, housing markets, and the Enterprises and taxpayers.

- There is no discussion of fees/expenses in the FHFA news release. That’s interesting. The proposal is for ~1mm refi’s over 24 months. How much is the re-documentation cost for one of these? $2,000? Who pays for that? Is the cost added onto the principal of the new mortgage? Do the Feds pay for all/part of it from the Hope Now money that Treasury is sitting on?

The expenses come to about $2b over the first 24 months of the program. That money will go to lawyers, banks and loan servicers. I, for one, am very happy that the bloodsuckers get another 2 large. It’s interesting to note that the fees eat into the benefits of the refi such that the first two years of interest savings are lost to the costs.


- The lower the refi interest rate, the better the economic results. This raises the question of, “What’s the Fed’s role in this?"

Bernanke has already pulled out all of the stops to assist refi’s. We have perpetual ZIRP, QE1&2, the Twist and a change in Fed policy to reinvest principal payments back into new MBS. As a result, we have 10-year Treasuries at 2.25%. The refi works much better if the 10-year is at 1.50%. My conclusion is that the Fed will announce a new LSAP (QE-3) in the not too distant future. While I see this coming pretty clearly, I still want to vomit.