Why Obama’s refinance plan is still missing the point

Yesterday, President Obama announced that he used an executive order to revamp the rules for the Home Affordable Refinance Program. The hope is to make it easier for struggling homeowners to refinance their mortgage and take advantage of historic low interest rates.  The new rules include allowing homeowners who owe more than 125% of the value of their home to refinance their homes as long as they are current on their mortgage. The process is also supposed to be streamlined and eliminating some of the fees. White House officials estimate these new changes will help 1 million homeowners (14 million are underwater) get some relief.

Forgive me if I sound skeptical.  The last time the administration announced a refinance plan, they estimated 5 million people would be helped. So far, less than one million have been through the program. Once again there is a lack of standing up to the banks.  The only loans that qualify for the program are those held by Fannie and Freddie.  The reason why the initial version of this plan and other plans to confront the crisis have failed, is because they lack any real pressure on the banks.

I am sure a decent number of homeowners will get relief from this move, but the impact on the crisis will be minimal.  These loans are not the ones hurting the housing market, since they aren’t sitting empty or for sale.  These are homeowners who while underwater are still current on their mortgage and not in danger of facing foreclosure.  The administration has said this will be the first in a series of moves, but once again I will not be holding my breath.

Until the President and Congress are willing to stand up to the banks, hold banks accountable, and force them to  help fix the crisis, any program will have minimal impact.  We can’t continue to use a spray bottle on a wild fire when it comes to finding solutions.  Until someone is willing to stand up to the banks that is all we will be doing.


Another Hurdle to Home Ownership

With all the talk about the QRM rule definition and the impact it will have on the housing market, another hurdle is flying under the radar.  Adam Rust from the Community Reinvestment Association of North Carolina (CRA-NC) has written a report about the other hurdle to home ownership, Loan Level Pricing Adjustments.

In short, these pricing adjustments are loan fees added to the cost of a loan that take into account the risk of the borrower.  This fee is designed to better assess the risk of a borrower and apply that cost to a loan.  The adjustment takes into consideration 5 key points: Credit Score, Property Type, Occupancy, Structure, and Equity.  Here is the breakdown of this adjustment as provided by Fannie Mae.

This adjustment does not take things like moving loans to FHA, the disparate impact on protected classes, and the use of private mortgage insurance into account.  Without taking these into account these adjustments can price out low wealth and minority communities from home ownership, and move more of the burden to FHA.  Just the QRM debate this also could have an impact on the rental market.

If you want to dig deeper into the topic I encourage you to read the report: The New Hurdle to Home Ownership


Imagine a World Without the GSEs

This post was written by Adam Rust and is cross posted from www.banktalk.org.

The political current in Washington seems predisposed to wind down Fannie Mae and Freddie Mac. The drive is so strong that even a center-left group like the Center for American Progress has abandoned its support for some public-purpose entity. The climate is so hostile that supporting the GSEs, even in a very different and scaled-down orientation, is somewhat of a radical point of view.

The logic provided by the supporters of such a measure is that private investors will step in to buy mortgages on the secondary market. That might happen, because yields would go up for the loans that were formerly packaged into agency pass-throughs. At the same time, those loans would be stripped of their “implicit” government guarantee. Most wouldn’t have nearly the same credit rating. Thus, there might be more yield, but there it would come in step with more risk.

We need to look at this problem and at least give some consideration to the worst-case scenario. It isn’t implausible that investors won’t buy all of those mortgages. After all, the risk-reward proposition isn’t that much different now. Today, Fannie andFreddie are buying more than 60 percent of all conventional loans.

One of the few sources of private investment in MBS comes from insurance companies. Unfortunately, that demand would shrink in a post-GSE environment. Insurance companies can’t afford to pursue high-yield high-risk investments. They have to hold low-risk assets.

Our mortgage market is entirely driven by government demand for MBS. Treasury is buying $1.2 trillion of MBS. The government is backing FHA loans. This is really a product of risk aversion. Knowing that their appetite has limits, banks are originating scores of FHA loans for borrowers with risk profiles that don’t meet the standards in the Loan-Level Pricing Adjustment matrix. That risk aversion on the part of investors should inform any calculation of the probability that the worst-case scenario comes to fruition.

In the worst case scenario, a cascading series of bad things happen. First, interest rates go up. Way up. That will dampen the prices on housing. For every one percent increase in interest rates, the cost of borrowing goes up ten percent. Some people say that mortgage interest rates would head north of 7 percent. That implies another 25 percent drop in home prices.

That leads to the next problem. With higher interest rate prices, fewer people buy homes. We already have a nine-month supply of homes on the market and another few hundred thousand homes circulating through the shadow market.

Fewer people will qualify for a refinance. Remember that housing prices have fallen twenty-five percent. It is hard to imagine that there are going to be many people where loan-to-value is still below 75 percent.  The refi problem could mean that more people are trapped in unsustainable mortgages. That could bring about more foreclosures. Of course, very few people are going to want to qualify for a refinance, because new loans will cost a lot more than old loans.

Then this spills over to the job market. If it is hard to sell your home now, imagine what it will be like when borrowers can’t afford to borrow. This isn’t just a problem for employees. It is also going to frustrate employers. Imagine that you need a new mechanical engineer or a new school teacher. The pool of such workers is going to dwindle. It creates a real paradox: fewer people have jobs, but employers have to pay more for labor!

GSE “reform” isn’t taking place in a black box, either. Regulators are about to raise the minimum capital ratios for our biggest banks. (I agree with Tom Brown‘s thoughts on this!) How many banks are going to want to hold onto a 30-year mortgage? Banks make those loans because they can sell them. Mortgage origination is about fees, not long-term interest payment. Under a higher capital ratio environment, holding a mortgage loan eats up precious capital. No thanks.

Did I mention the 30-year mortgage? My mistake. There will be no such thing.