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More on Refinancing Plan

posted by Adam Levitin

Chris Mayer, one of the authors of the refinancing plan, a version of which is currently being considered by the administration, wrote in to the comments on an earlier post, protesting my characterization of his proposal. I have no argument with Chris about there being too many frictions in the refinancing process. I'm not sure that this is the best way to fix them, however, and I'm also puzzled by what problem the proposal aims to solve.  Is the goal to stabilize the housing market or to provide economic stimulus?  

If it is aiming to stabilizing the housing market, it is hard to see how a refinancing program, no matter how massive or generous, will accomplish that, as it doesn't address negative equity or unemployment. Too-high interest rates aren't what's driving forecloses.  Yes, there's a large gap between current mortgage rates and the Fed Funds rate, but mortgage rates on existing mortgages are not especially high as things go.  Lowering interest rates makes mortgages more affordable, but we don't have an affordability problem per se.  We have a problem of mortgages being too pricey relative to employment and relative to equity in the homes.  This proposal doesn't fix those problems.  

Likewise, nothing in this proposal helps stabilize home prices.  Refinancing doesn't make new purchases more affordable.  It just makes existing purchases more manageable--if the homeowner is employed.  It is true that in terms of monthly payments it doesn't really matter if principal or interest is reduced:  one could drop rates from 7% to 4% on a $200K 30y FRM and have a similar effect to writing down principal to $143.5K. So maybe there really would be an effect on strategic defaults, as people might not mind underpaying on a overpriced house.  But as long as there's negative equity, it makes selling the house very difficult.  I don't see this eating away at the huge shadow inventory that is depressing home prices and contributing to the balance sheet recession. 

If this is a stimulus measure, then yes, it will be a stimulus, but it will be a very oddly targeted one. I'm not sure it is as progressive as Chris Mayer describes. It will help those who are mortgaged, but not renters and not free-and-clear title holders. That is more or less targeted at the middle class, but it's hardly precise. Think of this as a version of the mortgage interest tax deduction, but made available only to existing homeowners, not prospective ones.  

In his version of the proposal, Mayers is very clear who will bear the cost of this--bondholders--who will get socked with a wave of prepayments and find the value of their assets decline.  It resembles a light-weight version of Roosevelt's 1937 zapping of gold indexation clauses from bonds. I'm a little uncomfortable with doing stimulus via expropriation of bondholders rather than via democratically controlled tax and transfer. It would be a surprisingly radical move from an administration that has protected banks (and to some degree bondholders) pretty consistently. (And it's a bit puzzling given Mayer's opposition to bankruptcy cramdown.) But given the deep dysfunction of Congress on fiscal issues, it is time to think outside the box. 

Comments

Hi Adam-

At least you are starting to see this a little more clearly for how it is intended. But you still have a number of misconceptions, This is NOT an expropriation from bondholders. Bondholders bought callable bonds and fully expected to be prepaid when rates fell--unlike bankruptcy cramdowns which changes the rules. There is no legislation required here.

I am posting a link to this week's NY Times editorial strongly endorsing this plan and explaining why this makes sense. Clearly the NY Times does not think this is "Malarky" or a washed up Republican program. (http://www.nytimes.com/2011/08/26/opinion/a-lifeline-for-underwater-homeowners.html?_r=1&partner=rssnyt&emc=rss).

Your argument that lowering rates would not help housing or shadow inventory is a bit odd. This program is precisely targeted to address the "...problem of mortgages being too pricey relative to employment and relative to equity in the homes." People with poor credit and negative equity are the people who are now being denied the opportunity to refinance and are defaulting. It seems the only question is "HOW MUCH" will it help reduce shadow inventory, keep people in their homes, and provide stimulus--not whether it will do so. If you have evidence showing that the effects of a program would be small, then you should post it. Our website provides calculations showing that this would be a big deal and would predominantly benefit lower income borrowers (based on an analysis of 40 million mortgages in McDash). This is low hanging fruit and does not substitute for other ideas to help the unemployed or defaulted borrowers. Just because one idea does not solve all problems at once, does not mean it is not reasonable.

My final comment is to reprint (anonymously) an e-mail that I received today vividly demonstrating the problem we are trying to fix. I get these e-mails all the time. It is time to help 30 million families who followed all the rules and behaved responsibly in the crisis.

Dear Sir,
I know you are busy but please read our situation. I heard you on NPR the other and thought I would send you an email. I think with this whole housing/mortgage problem, the govt. is missing a whole segment of the population. My wife and I are retired. We did everything right. We worked hard, saved money, paid our mortgage off, raised 3 great kids, sent them to college. We sold our home in WA state and moved to sunny AZ. We found our dream home in AZ.

When we bought the home in AZ the stock market was doing great and our financial advisor thought it would be good to invest our proceeds from the sale of our previous home rather than put allot down. That bothered me but we followed his advise. We still put allot down. The home in AZ was $280,000 and we put $80,000 down. I thought that we would be fine as we both had some retirement savings and I had a small pension with S. S. on the way. Then the market crashed!! I wanted to put our money into cash but our advisor said everything would come back. It always does. Well, when you're taking money out to live on and mortgage payments to boot. Well you understand. You teach it.

Anyway, more of my story. We have a fairly good interest rate of 6%. Our mortgage payment is $1377.00 a month. But when you only bring in $3000.00 a month our savings goes down fast. The market in Phoenix is down 30 to 40 Percent so we are under water. I looked into a Modification but that didn't go any where. I played CITI mortgage games for a year and a half and figured out the reason they were playing games was, WE MAKE OUR PAYMENTS!!!!! We have never missed a mortgage payment since we have been alive. We have bought four homes, paid of 2. Our credit score is stellar. About 809.

Anyway, I read the HOPE NOW site about the HARP Program. We were a perfect candidate. Never late or missed payments. Good credit score. Income would meet new payments, and Freddie Mac backed. Here is the problem. You have probably heard this time and time again. CITI said we didn't qualify!!!! I called Freddie and they said I did but it would be up to CITI. I called CITI and they said it was up to Freddie. This whole HARP THING IS A SCAM! And the banks are getting away with it!! Lets face it. CITI doesn't want to work with me because we make our payments on time. Keep in mind, and I can't say this enough. WE ARE RETIRED. Fixed income!! Thats the segment that people are missing!! People think that if you're having mortgage problems its you're fault. We had plenty of savings. But lost about $140,000 in equity and home value. Another thing, I did shop around for a HARP loan. Very few lenders will go over 120% LTV. When I heard you on NPR I thought there might be hope. If I could save $200 to $300 a month, that would go a long way. I wish there was someone that could help. But as long as your current they won't work with you. THATS ABSURD!!! I DON'T DO THINGS THAT WAY!!

Thanks for reading this. I know you are busy but I do hope you read this. Thanks again,

Chris,

Yes, the bondholders bought callable bonds, but they bought them based on the expectation of normal refinancing programs, not extraordinary programs. I have trouble seeing how this is significantly different to changing bankruptcy law in this regard--the law is always changeable. That doesn't mean that anyone is counting on it.

I'm going to continue to disagree with you on the impact on shadow inventory. I don't see this having a significant impact. At best it limits the new bleed into the shadow inventory, but it doesn't eat away at what already exists. And as for the new bleed, it's heavily unemployment driven, and even for the negative equity component, I still don't see this helping substantially. At best it buys a bit of time by making mortgage payments closer to rental payments (because a renter is what a homeowner without equity is more or less).

Consider the email you cited: the problem cited is that the property is underwater, not that the 6% rate is unaffordable. The homeowner might decide to hang on longer with a lower rate, but if the house is 30-40 percent underwater, it might not be back in positive equity in the retired homeowner's lifetime. In any case, what I'm hearing in the email is that the homeowner would like so disposable income, not that it will determine whether there's a default. So this is really a stimulus move via the housing market, not a move to stabilize the housing market move.

One other point. In the post, I noted the equivalence in terms of monthly P&I payments of principal reduction and interest rate reduction. But they are VERY different in terms of their affect on consumer balance sheets. A principal reduction restores the consumer balance sheet immediately. The benefits of an interest rate reduction are amortized over the life of the loan (15-30 years). Unless the homeowner remains in the house for that length of time (which is unusual), the total benefit is much smaller. If the goal is to attack the balance sheet recession by cleaning up consumer balance sheets, refinancing alone just doesn't do it.

But, weren't those *big banks* essentially paid in the bailout to do loan mods? Wouldn't it be better for the emailer if they would just reduce his interest to the current market and let him save some money? Just as if he had gone through the hassle of a refi but streamline it because they were paid to do that.

All the foreclosures have taken away people's equity, so even if you have good credit and enough income to pay the loan you often can't successfully complete a refinance with an low appraisal.

But as I have mentioned before, the guy's current lender is on the hook right now. If the house won't appraise, they are still stuck. If he can't qualify, they are still stuck. If he stops paying they are still stuck.

They should be glad he is willing to pay the loan and just adjust the rate. No muss no fuss. And after all, that's what the bailout was supposed to pay for.

This is a farce that just keeps getting farcier. There will be no equitable solutions from any govt. body. Individual lawsuits that expose the "nuts and bolts" of what has happened will hopefully result in "death by a million cuts" for TBTF.

We are indeed suffering from an Economically Transmitted Disease...

Rogue Foreclosure Mill Harmon Law at it again.

This time the wild and crazy bunch attempts to defy an Order to Stay by a Federal Judge.

http://www.foreclosurehamlet.org/profiles/blogs/rogue-foreclosure-mill-harmon-law-at-it-again?xg_source=activity

I've read the plan and i like it. I agree wih Adam that it's not really addressing the core problems of negative equity and unemployment, but at the margin it seems to be a net positive, if only from the stimulative effects.

That said, i think it will be a challenge to find new MBS investors willing to buy newly issued MBS with a very high average LTV, which is likely who'd refinance. Certainly the fed could be the primary buyer of those but i worry about incresing the concentration of high ltv loans on the US balance sheet. Right now, such loans are distributed across all MBS investors. This program may cull all high MTM LTV borrowers out of those pools and into new, very high LTV, MBS pools for whom the only buyer may be the Fed, assuming that they fire up MBS purchases. Lord knows that the GSE balance sheets would not be able to support these w/out MBS issuance.

Malarky is right!

My comments are from the perspective of the 2005-2007 millions who have been dubbed “Responsible” because we are still making our “rent” payments on time every month to mortgage servicers. We fit into the #2 category Adam describes, “Borrowers who are current but lack equity.”

Correction: we are NOT “responsible” homeowners. We were bamboozled and we know who did it and how, down to every juiced loan doc, phony appraisal, etc. Yet we remain without federal champions so we have no choice but to pay. To us, this is nothing short of extortion.

We regard the recent flurry of activity concerning “blind-eye-to-FMV refinancing” as irrelevant. It does nothing to stabilize housing and will not, on its own, stem the bleeding. It threatens to distract from our more urgent question: How did we get into this mess and who is responsible?
Thanks to too few lawmakers, Mr. Barofsky’s SIGTARP, Ms. Warren’s COP, folks like Adam and a few brave journalists and documentary filmmakers – We are fairly certain that the Obama Administration is not doing all that it should be doing to investigate, punish wrong-doers and provide us with equitable relief if such relief is due.

The past few weeks have been notable to us:
• The SEC has apparently been caught shredding documents concerning potentially relevant investigations that were abandoned;
• Time is running out for kicking-off a plausible re-election campaign;
• The Administration and the New York Federal Reserve are pressuring the NY Attorney General to back off from investigating mortgage origination and securitization fraud;
• Some of the 50-states state AG’s seem to be following the federal lead against Mr. Schneiderman – and are pushing the old Hillary Clinton-Brian Deese-Rob Rubin “tort reform” idea to protect “responsible bankers” (http://articles.nydailynews.com/2008-03-24/news/29429080_1_underwater-mortgages-mortgage-companies-mortgage-papers );
• The Super Committee is gearing up for work that could provide the ultimate “invisible cloak” for otherwise debatable legislation.

Americans really only demand two things from government: Truth and Fairness.
So… Where are the federal champions for Truth and Fairness?

We also want something very specific from our real property recording systems. But that’s another story.

The current discussion in this forum leads us to believe that category 2 homeowners have been abandoned. Barbara Boxer’s bipartisan bill S.170, co-sponsored by Sen. Johnny Isakson, R-Ga., does nothing for us (House version: HR 363). If the note on Senator Boxer’s website is correct - “…the plan is also expected to lead to up to 54,000 fewer defaults by homeowners and produce a net savings of up to $100 million for Fannie Mae and Freddie Mac…” - then, what’s all the fuss? It’s nada, bupkis, zilch no matter how you slice it.

If you cut our rates, our payments are still higher than FMV rent. We still can’t generate break-even cash flow by turning it into a rental property. We still can’t sell and relocate for better employment or retirement. So where’s the stimulus or stabilized housing if we still won’t spend another nickel on a nail from Home Depot, and are wondering how much longer will we put up with this nonsense.

Adam is right: “… We need a TARP for Main Street. This isn't it.”

Chris Mayer's plan will help those who're upside down, current, and have enough income to qualify for a new loan under reasonable 30/40 debt ratios. The 120% LTV retiree from Arizona would receive a nice payment relief if he could drop form 6% to 4%. However, this BWR isn't hurting the housing market.

It's the person who's seen their income drop 50%, has school-aged children, and is underwater and 6+ months delinquent on his mortgage that has killed the market. This guy needs a 30-40% principal reduction and a 4% rate, if he's going to be helped or saved.

So far, it doesn't look like there's the financial or political will to salvage this homeowner, or the 6 million other delinquent BWRs like him.

Sorry, you people are all missing the point. Tens of thousands of foreclosure judgments have been founded on FRAUD. The banks, their shill attorneys, and robosigning stooges perpetrated a massive fraud on a scale never seen before in history.
Every single real estate transaction since 2000 needs to be examined for fraud. This is AMERICA. We are supposed to be a nation of laws. Don't we think we are better than all the countries whose elected officials are corrupt? Aren't we supposed to be the guys in the white hats? Don't we believe we'd never become Nazis?
Huh. How then, do you explain robosigning? How then, you explain the attorney general of Florida, inarguably the epicenter of foreclosure fraud, taking campaign "contributions" from the fraudulent affidavit mill, Lender Processing Services, the top three guys at the wayward process server, ProVest, and the attorney for foreclosure mill Daniel Consuegra? Each of these companies was under investigation for foreclosure fraud-related activities before the AG's race. Active, ongoing, investigations. She also took a campaign contribution from Bank of America. Correct me if I'm wrong, but, last time I looked, Bank of America was under investigation by the 49 states attorneys general. (Go, Eric!) What do you call it when a company under investigation gives "contributions" to the campaign of the investigator? You tell me: what's that called?
The only way to make this right, the only way to move forward, is to hold the banks' feet to the fire over all this fraud. Forged assignments, backdated assignments, assignments created out of thin air, people lying in sworn testimony, notary fraud... What are we going to do about all the FRAUD?
Here's the reason the banks are so hell bent to settle. All this fraud, plus MERS, may very well have created what David Woolley, author of an excellent white paper, calls "wild titles." A wild title is a title where the chain of title has been broken, by fraud or by MERS. A property with a broken chain of title can't get title insurance. Every property line is up for grabs - not simply the subject property. If a neighbor's property has a wild title, it could affect your property.
Read this white paper. Then run, don't walk, to your local clerk's office and take a look at your assignments of mortgage. Then look at your neighbors'. You might not like what you see. Check all the dates. Google all the signors, even the notaries'. If there's MERS, it could be a problem. If there was a foreclosure, that could be a problem. This is the other shoe. This is the elephant. This is why the banks are pushing for a settlement with no investigation.

http://www.scribd.com/doc/61543981/MERS-The-Unreported-Effects-of-Lost-Chain-of-Title-on-Real-Property-Owners-and-Their-Neighbors

Every single real estate transaction. It’s the only way. This is AMERICA. We cannot allow fraud to stand.

I don't know if Mr Levitin, or Mr Mayer read these comments, but the comment above, by "lizinsarasota" reveals and "gives a name" to the herd of "elephants in the room" where this "national discussion" is (not) taking place.

"Non-objective, non-reporting" national media, 1rresponsible economists, "in the bag" politicians, regulators who have been "captured by the entities they are supposed to regulate" and the executives of the banks and other corrupt financial corporations all hope they can continue to ignore. These entities are the " 'master(s' of ceremonies" in this ugly "three ring circus."

The "elephants," MERS, the systemic financial and procedural fraud perpetrated by Wall Street, and those AGs who continue to represent corporate donors (instead of voting citizens) are infecting our judiciary and have destroyed all semblance of "clean title" in the land registries of every county in our nation.

This "herd of elephants" is far to large to "sweep under the rug." Indeed, the whole circus needs to be taken down.

Those co-conspirators and so-called "representatives of the people" (including governors and current and ex-presidents) who continue to ignore the presence and truth of this masive Ponzi scheme, or worse yet, are the "cleaners" who are grabbing "political brooms" and making a show of "lifting the carpet"... but no more -- these are the ones who will eventually be "taken out with the garbage they created."

"If this is a stimulus measure, then yes, it will be a stimulus, but it will be a very oddly targeted one. I'm not sure it is as progressive as Chris Mayer describes."

Why would you want to do something "progressive" in the first place? We've been trying that for years only to find out that transferring money from people who make good financial decisions to people who make bad ones doesn't work so well.

The solution to this seems totally obvious - sit back and let the thing work itself out. Repos and short sales and bankruptcies, it's just got to happen for the system to recover. The last thing we need is more intervention by an monstrous organization that can't do anything the easy way.

For those who want more and more government intervention, spend a little time noodling around this site which explains how the Department of the Interior spends money. Not where it spends money, but the mechanics of it. It's hopelessly complicated and inefficient. And we want more of that? Really?

http://www.doi.gov/pam/aindex.html

"the bondholders bought callable bonds, but they bought them based on the expectation of normal refinancing programs, not extraordinary programs. I have trouble seeing how this is significantly different to changing bankruptcy law in this regard--the law is always changeable."

I think the difference is pretty obvious. In one (refi) you get all your money back and can reinvest it at market rates, and in the other (cramdown) you don't. That is a huge difference. I can't imagine how giving someone their money back is expropriation. By definition, expropriation is taking someone's property. But it is the law ex ante that mortgages are repayable at par plus accrued at any time. So there is no property to be taken from lenders in respect of future income. That is of course what makes 502(b)(2) part of our bankruptcy laws. The fact that the government chooses to fund / guarantee the repayment is the opposite of expropriation. And bulk refis versus ad hoc refis hardly changes that.

Notice how Adam and Chris are disagreeing over whether and how much the refi proposal would help "underwater but current/creditworthy borrowers". The refi proposal has nothing to do with helping such people. The refi proposal is all about helping the banks/bondholders who fear strategic defaults and billions in losses if taxpayers don't help the "underwater but current/creditworthy borrowers" make their payments.

The discussion here is missing this key point: underwater borrowers don't need mortgage relief to reduce their monthly payments. All they need to do is walkaway and rent. Stop making your payments. Save the cash you are paying to the bank and use it to pay off your creditcard and other debts so you don't need a FICO score. Use your remaining cash hoard in 12 to 24 months (the minimum time it will take the bank to foreclose and evict) and put it down on a lease. You'll sleep like a baby and the "underwater" problem will be the banks/bondholders' problem, not yours.

I feel bad for people who lost value in their homes, but should junior employees pay taxes to "stabilize" (i.e. inflate) the housing market (at rates they can never afford to buy into) simply because baby boomers "bought their dream home" instead of living in a modest house and using the savings to fund their own retirement?

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