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Refinancing Malarkey

posted by Adam Levitin

It looks like the Obama Administration is about to endorse some version of the Hubbard-Mayer plan of letting everyone (or at least everyone with an agency mortgage) refinance at today's low rates, regardless of whether they are delinquent or underwater.  (Gotta love how the administration picks up a 3-year old Republican plan with obvious deficiencies and acts like it's fresh meat.) I fail to see how such a plan will accomplish much.  

The ability to refinance depends heavily on whether a homeowner is current and has equity. Consider, then, the impact on the 4 categories of homeowners under this rubric:   

(1) Borrowers who are current and have equity.  Refinancing is always possibly for anyone who is current and has sufficient equity in their home. That's a lot of existing borrowers for whom a new refi program does nothing. 

(2) Borrowers who are current but lack equity.  There is also a large pool of borrowers who are current, but have insufficient equity or negative equity for a refinancing. A new refi program probably doesn't do much for them either. It doesn't take very much equity to do a FHA refinancing, but putting that aside, the Home Affordable Refinancing Program (HARP) allows for negative equity refinancings. There haven't been a lot of them, however, and I think that bodes poorly for any new program. The closing costs for refinancings can be a major obstacle for households without a lot of extra cash sitting around and with uncertainty as to whether they'll stay in an underwater house long enough for the lower rates to make the refinancing worthwhile.  

(3) Borrowers who are delinquent, but have equity.  These borrowers can already get out of the house via a sale.  In any case, most of these borrowers are seriously delinquent, not just 1 or 2 months delinquent.  Lower monthly mortgage payments aren't going to do a thing to change their delinquency or the pending foreclosure. 

(4) Borrowers who are delinquent and lack equity.  As with delinquent borrowers who have equity, most of these borrowers are seriously delinquent, not just 1 or 2 months delinquent.  Lower monthly mortgage payments aren't going to do a thing to change their delinquency or the pending foreclosure. 

So in the end, it's really not clear who this would help.  It ignores that there's already been lots of refinancing at low rates since 2008--it's not clear how much more refinancing some new initiative will possibly produce, much less how many foreclosures it will prevent.  The refi idea seems to do nothing on either negative equity or unemployment. Any program that fails to address those just isn't serious.  I get that the administration has a MacGyver problem given that it can't move anything in Congress, but that necessitates much more creativity, financially and legally, not rewarming old ideas.  My prediction:  this ends up accomplishing about as much as FHAShortRefi or Hope4Homeowners.  

We need a TARP for Main Street.  This isn't it.  


Would not homeowners in categories (3) and (4) be helped since their loans would be no longer delinquent? Wouldn't pending foreclosures be cancelled if a loan is refinanced?

There needs to be some type of streamline refinancing made available for underwater but current (and well employed borrowers). HARP was close but there were too many overlays from lenders and some dumbass rules from Fannie/Freddie. There are a ton of people who would like to refinance and teh only reason they can't is due to the appraised values. They are in no danger of losing their homes, good credit, well employed, etc. However, they can't write a check for $50k or whatever it may be to keep the loan to value at a level that makes sense for refinacning.

The problem is by the time the banks/fannie/freddie get through overlaying with price hits and adjustments, the actual benefits of refinancing to lower rates are gone. Prime example is FHA. FHA used to have a great streamline program - no appraisal, no income. Just drop the rate and you are done. Problem now is that you can be at 6% and want to drop to 4% but it doesn't make any sense to because FHA jacked up the MI premium on new loans. So now you are saving money on teh interest rate but pissing it away with higher MI premiums. No point in refinancing....

Refinancing delinquent borrowers is insane. If someone is delinquent on a mortgage, saving $200 bucks a month or whatever it amounts to is not going to stop an eventual foreclosure. People are delinquent because they have no income... this is why modifications typically fail.

One idea they should also consider is instead of a mortgage interest deduction, why don't we do a dollar for dollar tax break for PRINCIPAL reduction?

Give people a tax break for paying down their mortgages instead of a tax break for having a bigger mortgage. This would encourage everyone to deleverage. This helps out borrowers and banks by reducing their loan portfolios.

If I knew I was going to have significant tax break for paying off my mortgage, I would do whatever is necessary to start paying it off. Instead of 401k deduction, I move that money to additional principal.

Just a thought....

With the Fed. Funds rate at around .25% why are we paying more than 1%-2% interest on a mortgage. The money is ours, not the banks.

Alan Solot--I think there's an open question as to how past delinquency would be treated with a refi. It probably would just get amortized over the life of the new loan. If so, that would clean up the past delinquency and the payments would be lower, but unless the delinquency was caused by a passing problem--temporary unemployment, now fixed--it won't do much good. It just kicks the can down the road 3 months.

Also, will they refi unemployed homeowners?

Isn't it a little glib to say that borrowers who are delinquent but have equity can solve their problems by selling? With the glut of homes on the market in so many cities, paper equity is hard to convert into cash quickly -- especially when the homeowner trying to sell at retail is competing with the bank owned properties and short sales.

There's another subcategory to think about, which is borrowers who are current and have some equity, but don't have the stellar FICO required to get a refi approved these days. Will this program make low rate refinancing available to any and all regardless of credit score, just by asking for it? If so, the applications will come in like a deluge of biblical proportions.

Yes. It is a little glib. You'd have to have real equity, not say 5%, and be willing to sell low to move the house quickly.

It's kind of silly for the GSEs not to refi an existing GSE loan because of a low credit score--they've got the risk already, so why not reduce it with a more affordable loan? It will mean giving up an above-market asset, but that's mitigated by the lower default risk.

Adam, you touched on it.

I have a loan from a big bank. As far as I can tell it was not securitized.

I probably can't qualify to refinance right now, not enough income, but I have made all the payments and I have hundreds of thousands in equity.

One thing they want to refinance is a credit report, the other thing is an appraisal. I asked "why?" You're already loaning me money, if my credit was a problem I would still owe you. Again, if the house won't appraise, what does that matter now? You already loaned on it. If it did happen to be underwater, you can't get away now by getting an appraisal, you are already on the hook.

What I'd rather get is a loan mod, just to lower my rates and payments, but no, can't get that for some reason.

Adam--category 2 seems gigantic, and those homeowners haven't received very much help, particularly given the higher demands on mortgage insurance, etc. Here's what I would like to see:

For borrowers who are:

a) underwater in their mortgage
b) have owned their house for at least five years (before the crash)
c) current on their payments

they should be allowed to do a no-fee refinance, and without a second appraisal. The government could pay for the fees via a forgivable loan (say, $1,000 for every year of ownership), creating an incentive for people to keep their homes.

I suspect there are a lot of people who would rush to refinance if they knew they could do it without paying fees, and without having to go through a new appraisal. This would provide stimulus to the economy and, unlike other housing proposals, reward responsible, but unlucky, homeowners.

Here's a thought:

@whitehouse Make the banks reset ALL mortgages to FMV and let them use the NOLs to offset profits for 3-5 years. Housing crisis solved!

Refinancing is the opposite of deleveraging. There is nothing new here. Banks persist in the delusion that home price appreciation will turn the straw on their balance sheets back into gold. The current Administration's mortgage crisis policy is fundamentally the same as its predecessor's. http://pubcit.typepad.com/clpblog/2008/06/tokyo-drift.html.

what they need to do is get all those second mortgages that are portfolio loans off the banks books - they need a program to roll those seconds and agency firsts into one govt. loan at lower rates. this would help with the banks solvency issues and would give the bondholders a higher balance/higher coupon sustainable bond they want. in exchange the homeowners would have smaller monthly payment. i bet they could write down those 2nds 30 percent and still have this make some sense.

What? Refinancing _is_ deleveraging. You're replacing a loan with a lower-interest loan, which decreases the drag debt has on your spending.

Every loan should be remarked to market price aka principal reduction to the actual value THEN refinanced at a lower rate. The only thing stopping this is pure greed and the banks need to extend and pretend.

Who would this program help? Me. My neighbor two floors down. I've been trying to refinance my mortgage for over two years now. If my servicer simply lowered my interest rate, I would save $400 a month, and I have a relatively low 7% interest rate. We talk about these mortgage holders as if they'll cease to exist after they foreclose. Where do they go? They become renters.

There was a story in the money section of ABC News, ‘Solving Foreclosure Crisis, a Rental at a Time’ by Steve Osunsami. He cites an instance where a homeowner went from a $1,100 a month mortgage payent to a rental payment of $850 a month after an investor bought his property and rented it back to him. They didn’t give the specifics, but to get to $1,100 a month, let’s pretend his loan was for around $165,000 at 7%. Now, if the bank had refinanced his loan at current rates, around 4.4%, guess how much his mortgage payment would have been? $860. How much is he renting for? $850. What does he get out of this situation? No guarantee that his rent will not increase, no mortgage interest deduction, no home ownership after 30 years, and no hope of recouping the money he already put into the property (and many many were not the 0% deadbeats down we all hear about, myself among them). So in the end, he's worse off. It doesn’t make any sense.

Why should the government help people stay in their homes? Because there are not enough people to fill the homes once they’re abandoned. When these people foreclose, the property will resell at a massive loss to someone else. Who takes the loss? The taxpayers. Most of the loans are owned by Fannie and Freddie. Bank of America just unloaded a ton more bad loands onto the Government. When these loans go bad, taxpayers lose. Refinancing people ahead of default or foreclosure is loss mitigation (and the right thing to do), not a bailout of irresponsible people.

Hi Adam and others...

Not sure where you received your information, Adam, about the plan, but I think that but your criticism is misplaced.

To read about the plan in detail, go to our website at http://www4.gsb.columbia.edu/realestate/research/housingcrisis.  This link will answer many questions and misconstrued comments.  

There are many mortgage market frictions making it nearly impossible for many borrowers to refinance the way companies have.  These frictions disproportionately harm borrowers with lower mortgages amounts, higher LTVs, and worse credit, so this is a very progressive plan.  I am surprised that you are not sticking up for middle class homeowners who should be able to benefit from low interest rates but have unable to do so.  The bulk of the interest savings under our plan go to lower income homeowners and are paid for by bondholders.  Our plan would not charge closing costs or LLPAs to borrowers--they are built into the new rate of 3.8-4.1 percent. This also is done in a way that is budget neutral or better for taxpayers.  

This is not a Republican plan, unless Senator Barbara Boxer (D-Ca) and Rep. Dennis Cardoza (D-CA) have changed parties recently, along with other Democratic supporters. Boxer and Cardoza have introduced legislation to pursue a mass refi.  The opponents are bondholders, the GSEs, and banks.  Not sure why you would line up with those groups against ordinary Americans homeowners.

You are right, this plan does fix all evils and is not intended to do so.  Many other steps are needed to try to help delinquent borrowers.  But Fed policy has not gotten through to consumers. We need to help.

-Professor Chris Mayer

I took a look at Professor Mayer's site and note his paper in December 2008 claiming that "house prices are already at or below where they should be based upon fundamentals." His paper also claimed that home prices are strongly related to interest rates (inversely). At that time, he was recommending the same solution but with interest rates at 30 year lows of 5.25%.

Of course, had we adopted his solution in early 2009, those government guaranteed refis would now be seriously underwater and taxpayer losses would be many multiples of what they already are from the FHA subsidies of new home purchases during the past few years. Of course, the banks that received the refi proceeds of such government action in 2009 would have been much better off than they are now.

Indeed, that is the real objective of the refi solution: paying banks and bondholders a premium over the present value of the bad debts on their books. Yet the solution will always be marketed as saving the borrower.

Foolish borrowers and foolish lenders must be allowed to sink together in the same boat. And for those fooled by Mayer and other crony capitalist apologists, remember that this sinking boat hurts lenders much more than it hurts borrowers. Borrowers have nothing to lose but possession. Lenders lose not only the loan but the capital reserves. In the end, this is nothing but an indirect bailout of bank insiders and shareholders at taxpayer expense.

We've been overcorrecting since December 2008? I think not. We had a fading middle class masked by overheated credit. Now the mask is off, and as the middle class continues to fade, so does the housing market. At best, this plan keeps people in houses they will never have equity in, which makes them nothing more than renters in disguise, and subsidized ones at that. At worst, it is more extend and pretend, keeping people in houses they can not afford for a little while longer on, ultimately, the taxpayer's nickel.

The link is Prof Mayer's comment is broken.

real world to economist:
If your monthly payment goes down by 50 or even 25 bucks, for a lot of people, that money makes a difference.

Capitalizing mortgage arrears for middle class borrowers only hides the true costs and it totally absolves the Mortgage Servicer and Mortgage makers of any ill gotten fees and/or secularization defects. Debtors get to stay in their home but will pay $1000s if not $10s of thousands more in amortized interest. It keeps them in their home yes...well maybe...maybe not permanently. FHA has never been a problem until we let investment banks in. They screwed up things so badly that we may never see the investments in our homes even if I could refi my 6% to a 4%(plus points uhhhgg!)

"Sticking up for the middle class"...hmmmm.. No amount of gov. guarantee or gov. sponsored refi's will boost someone who has fallen out of the middle class back into the middle class. Being able to purchase a home will not get us there either albeit may stop the bleeding for a bit.

Jeff-love your enthusiasm but this sinking boat only hurts us (poor and middle class). Wall Street execs have been insulated from this pain hiding behind and insulated by their inc's.

The mortgage bust is a symptom not the disease. Low wages is the disease masked by the availability and the racking up of consumer debt for the last 30 years. It was going to catch up to us sooner or later. We have waged a war against the middle class. Guess what? "Individuals"(ie.) like the US Chamber of Commerce have won that war and this is whats left. Lower wages but higher corporate profits with no regard for sustainability.

Solution: Jobs, higher wages and get people out of debt easier not harder (BAPCPA)and demand will follow...

(or at least everyone with an agency mortgage)

If that's the case, wouldn't underwater homeowners who are NOT delinquent be most likely to refinance and would that not exacerbate "pre-payment risk," thus further decimating portfolio performance and increasing the federal price tag?

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