Every once in a while a rumor or somewhat-substantiated story sweeps through the mortgage banking world about some radical proposal. On the trading desks it was typically something like, “The Chinese are in buying” or “Middle East countries are in selling MBS’s.” Often there was nothing to back up the story, which was often used as an excuse when no one knew exactly why MBS prices were moving higher or lower.
Several months ago headlines sprang up conjecturing about some magical, all-encompassing refinance of all the residential mortgages in the United States. Chatter about this rose up, spooking the mortgage herd, making loan officers wring their hands (“All my clients will refinance through the US government and go away!”) and causing a tremendous amount of concern among MBS investors (“I just bought this pool of MBS’s at 103, and now it is going to pay off at 100 and I’ll lose 3 points?”). Although nothing serious ever developed from it, many companies spent time and money working on the impact of such a program on their business.
This story has surfaced again, this time from the National Mortgage News. The industry is scrambling again, investors are spooked, and companies are wondering how something like this might impact them. At this point, however, there is very little upon which to focus, with some wondering how much truth is in the story. The President is on vacation, as is Congress. The elections, which are well over a year away, seem to have made any efforts at serious legislation grind to a halt. The government has been half-heartedly trying to figure out what to do with Freddie and Fannie for years, to little or no avail. Perhaps, as one trader put it, this is a talking point ahead of the elections. (Do we really have to listen to campaign rhetoric for another 15 months?)
Digging into the details, there are approximately $11 trillion of outstanding residential mortgages being serviced. Of this, over $1 trillion are 30-yr mortgages between 5.75-6.125%. There is over $600 billion between 5.25-5.625%. Any system-wide attempt to refinance these loans would face huge odds and logistical challenges. Would appraisals be required? How would investors be made whole? Would the government work through existing LO’s, and how would they be compensated? Who would pay them? What if the borrower was not current? The list goes on and on.
"White House Contemplating Major Refinancing Program?" What about Congress working together to make some headway on our housing problems? Many argue that Congress was unable to successfully deal with a growing budget deficit in a long-term manner. It is easy to find faults and problems with suggestions, but many feel that Ocwen’s recent loan modification program actually makes sense from a practical and economic point of view.
Late in July loan servicer Ocwen Financial announced the rollout (to 33 states) of a new loan modification program for borrowers with underwater mortgages. Its “Shared Appreciation Modification” (SAM) program, writes down an underwater borrower’s principal balance to 95% LTV, thereby creating home equity. Then, over three years, the written-down portion is forgiven in one-third increments, so long as the homeowner stays current on mortgage payments. Later, when the house is either sold or refinanced, the borrower must share 25% of the appreciation with the investor of the loan. Ocwen believes this approach won’t reward borrower delinquency, which is always a concern when offering a loan modification. Although the jury is still out on this, the initial response in the financial community has been positive. And this seems to have come about without a government mandate.
Unless something has changed that I am unaware of recently, mortgage companies exist to make a profit. As do servicers, as do investors, and so on. An attempt by the government to take trillions of dollars of existing mortgages and refinance them could turn into a nightmare, not only for the companies involved, but also for borrowers, who had good payment histories, who have recently spent thousands of dollars in order to lower their rate and payment. So although the idea has resurfaced and made mortgage bankers and investors nervous, the odds of the program actually taking flight are slim to none.
6 Comments
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Gilbert Ocrone
68
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Ken Post
73
"If HUD was really serious about helping lower housing payments, they could do so immediately by allowing FHA streams with the monthly MIP staying the same rather than doubling. That would put FHA streams back on the table, and benefit one heck of a lot of borrowers on the spot!" EXACTLY!
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homer nelson
73
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Later, when the house is either sold or refinanced, the borrower must share 25% of the appreciation with the investor of the loan. Ocwen believes this approach won’t reward borrower delinquency, which is always a concern when offering a loan modification.
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Matt Lind
263
While lowering mortgage payments may have a significant stimulative effect, it is also possible that much of the increased consumer cash flow will go into reducing debt or --- believe it or not --- savings. And it will do little to stimulate new or existing home sales beyond somewhat lowering the rate of new foreclosures. And without a sharp rebound in housing and home sales, a recovery in jobs is going to be very slow.
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Ted Rood
266
It seems obvious that any mass refi would require LO/lender participation to have any chance of success. It's not like HUD is set up to handle 100,000's of refis (or much of anything else) in an efficient manner. Best case scenario is "HARP 3" (HARP's already been extended once), with relaxed requirements for equity and closing dates. If HUD was really serious about helping lower housing payments, they could do so immediately by allowing FHA streams with the monthly MIP staying the same rather than doubling. That would put FHA streams back on the table, and benefit one heck of a lot of borrowers on the spot!
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