Refinance rules change for some underwater mortgages

[MichaelB]

Calculated Risk posts this morning some news (reported by WSJ) that will benefit homeowners with mortgages guaranteed by Fannie Mae or Freddie Mac. Calculated Risk: WSJ: Details on New FHFA Refinance Program, No LTV Limit, Eliminate appraisals

Federal regulators on Monday plan to unveil a major overhaul of an under-used mortgage-refinance program ... The overhaul will, among other things, let borrowers refinance regardless of how far their homes have fallen in value ...

The plan will streamline the refinance process by eliminating appraisals and extensive underwriting requirements for most borrowers, as long as homeowners are current on their mortgage payments ... Fannie and Freddie have also agreed to waive some fees that made refinancing less attractive for some.
...
Pricing details won't be published until mid-November, and lenders could begin refinancing loans under the retooled program as soon as Dec. 1 ... Loans that exceed the current limit of 125% of the property's value won't be able to participate until early next year. The program's expiration date ... will be extended through 2013. HARP is only open to loans that Fannie and Freddie guaranteed as of June 2009.

 

[MichaelB]

A few more details. This looks like something that would interest members here that have complained about difficulty refinancing. It also reduces the cost.

• No more appraisals. The new rules eliminate the appraisal requirement, which means that no matter how far underwater your home is, you can qualify.
• No more extensive underwriting requirements. If you have a slight blemish on your credit history, you should still qualify.
• You have to be current on your loan. At least, you have to have made the last six payments on time and in full, so if you are behind on your loan - even if the lender told you should stop paying - you won’t qualify.
• Fannie Mae and Freddie Mac will waive some new fees. This boosted up the cost above what it would pay for some homeowners to refinance.
• An estimated 1 million homeowners should be able to refinance. If they can save at least $200 per month, that’s billions of dollars in savings.

Full details are likely to be available sometime this week.

​

 

[gerntz]

I don't think you'll need to be underwater to utilize this.

 

[ERD50]

Interesting. We'll need to see the details, and I haven't really thought through the effects of what we do know, but it seems positive to me.

Allowing one to re-fi to lower rates, even if they would not qualify for a new loan, seems to help things. That person has a lower monthly payment, they're not any more 'upside-down' than they were, so no 'harm' there. They are now less afraid of losing their home, so they can be a little free-er in spending the higher discretionary income they now have.

And I think on average, it leaves the banks in a better position. There is less chance of getting stuck with a poorly maintained (maybe even a stripped-out) home to try to sell.

All in all, (unless I'm missing something), this seems to add stability to the market and the economy, and that seems to be the most important thing in fighting the Catch-22 of less-hiring-because-fewer-are-spending-because-of-fear-of-losing-their-job-because-there-is-so-little-hiring.

Sounds like a step in the right direction. Twenty or 30 more ideas like this, and the economy might just pick up a bit.

Anyone see any downside? Will mortgage makers lose out if rates rise? Do these need to be variable rate, so we don't just create a problem down the road if rates rise?

-ERD50

 

[samclem]

Well, it's not like the higher payments folks are now making are being flushed down the toilet. The higher interest rates on these still-performing loans are helping the banks who made the loans (the banks we just bailed out a few years ago, and which are still going under).

Buying votes? "The government made the bank reduce my mortgage payment, I like that government."

Are we trying to use homes to artificially pump money into the economy again? Didn't we learn anything from the last time we did that? Is the government (i.e. you and I) still on the hook if these artificially low-priced mortgages (i.e. loans that private mortgage lenders won't write because of lack of supporting home value or lack of supporting good credit by the borrower) go sour?

 

[ERD50]

Are we trying to use homes to artificially pump money into the economy again? Didn't we learn anything from the last time we did that? Is the government (i.e. you and I) still on the hook if these artificially low-priced mortgages (i.e. loans that private mortgage lenders won't write because of lack of supporting home value or lack of supporting good credit by the borrower) go sour?

I hear ya, and agree in concept. However, to the extent the govt got us into this mess, maybe we need them to help unwind it?

Sure, the banks will be getting lower interest rates overall, but is that offset by more people making their payments and less loss with fewer homes being handed over to the banks (in bad shape)? And if it overall helps stabilize the economy, that's another plus.

It's not like they are just wiping away the debt - this is just allowing a re-fi in spite of the upside-down nature (which isn't going to change due to this). Seems like it could help.

Maybe there should be more strings attached - limits on any other borrowing until they get back to 25% equity on the loan?

-ERD50

 

[Mulligan]

I don't think you'll need to be underwater to utilize this.

I will need to follow this. I used HARP not because I was underwater, but because I was able to refi at a lower rate with minimal costs including no appraisal. At that time I got 4.83% 30 year, little over a year ago. Might be worth my time if I can access it again, but I bet it's only a one time per person program.

 

[samclem]

Sure, the banks will be getting lower interest rates overall, but is that offset by more people making their payments and less loss with fewer homes being handed over to the banks (in bad shape)?

I'm sure there are cases where it would be good for the lender (fewer foreclosures= lower costs), can't they just agree to do it? If not (e.g. there's some FM/FM stipulation against renegotiating a loan that is underwater), then it would seem best just to allow the lenders to renegotiate the terms (where it makes sense to both parties) rather than forcing them to do it.

And if it overall helps stabilize the economy, that's another plus.

I think we may be better served by keeping the issues separate and not trying to "help" the economy by artificially reducing mortgage rates for troubled loans. Co-mingling them is how we got in trouble the last time.

 

[Mulligan]

I'm sure there are cases where it would be good for the lender (fewer foreclosures= lower costs), can't they just agree to do it? If not (e.g. there's some FM/FM stipulation against renegotiating a loan that is underwater), then it would seem best just to allow the lenders to renegotiate the terms (where it makes sense to both parties) rather than forcing them to do it.

I think we may be better served by keeping the issues separate and not trying to "help" the economy by artificially reducing mortgage rates for troubled loans. Co-mingling them is how we got in trouble the last time.

Sam, you got me thinking. When I called Wells Fargo a year ago, which my originator, I was just inquiring about a regular refi. They told me to use the HARP. I told them I thought you had to be under water, and they said no. Looking back it seems like they were eager for me to use it. I was fine with it as it was cheap and a breeze to do, but they wanted to go that way originally not me. I wonder why.

 

[MichaelB]

These are not troubled loans and nobody is forcing banks to do anything. They are as anxious to refinance underwater mortgages as homeowners. The problem is lending rules don’t allow that in too many cases. All this does is let homeowners with negative equity have the same opportunity to refinance at a lower rate as other homeowners.

Allowing people with positive equity to take advantage of lower rates but denying people with negative equity the same opportunity is not sound economic policy.

 

[samclem]

These are not troubled loans and nobody is forcing banks to do anything. They are as anxious to refinance underwater mortgages as homeowners. The problem is lending rules don’t allow that in too many cases. All this does is let homeowners with negative equity have the same opportunity to refinance at a lower rate as other homeowners.

Allowing people with positive equity to take advantage of lower rates but denying people with negative equity the same opportunity is not sound economic policy.

I don't know if there's an official definition of a "troubled loan." I'd say bankers stuck with negative equity loans (e.g. loans for which the bank has zero collateral, and in which those making the payments come out ahead if they abandon the house) might reasonably characterize these loans as "troubled." Would the lender write such a loan today?

If loans were written with all the risks included, there's a darn good reason that someone with "negative equity" would pay a higher rate than someone with real equity. The main reason we're in this mess is unsound political policy--it has nothing to do with sound economics.

If the banks/mortgagers aren't being forced to write the new loans, that's better. Better still is to make them write the new loans without any underlying govt guarantees/subsidized rates. That's how we'll find out what the rates should really be for each loan.

 

[ERD50]

These are not troubled loans and nobody is forcing banks to do anything. They are as anxious to refinance underwater mortgages as homeowners. The problem is lending rules don’t allow that in too many cases. All this does is let homeowners with negative equity have the same opportunity to refinance at a lower rate as other homeowners.

Allowing people with positive equity to take advantage of lower rates but denying people with negative equity the same opportunity is not sound economic policy.

That's a good distinction. So if I understand this, it is opening up the rules, so that banks can make the free market decision to allow someone to re-fi, if the bank want to make that offer.

Sounds like this is un-doing a technical restriction. I think that's why I'm OK with this (again, assuming my understanding is close to right). I'd still like to see lenders require 20% down on new purchases - I think that helps protect everyone.

edit/add - just saw samclem's post:

The main reason we're in this mess is unsound political policy--it has nothing to do with sound economics.

No argument from me, but what is done is done. I think this could be a reasonable aid in working our way out of the problems.




-ERD50

 

[samclem]

That's a good distinction. So if I understand this, it is opening up the rules, so that banks can make the free market decision to allow someone to re-fi, if the bank want to make that offer.

Except it's not a free market decision. It would be a free-market decision if the taxpayer's thumb weren't on the scale (subsidizing the low rate for underwater loans via FM guarantees).

If we want to know if any activity is being paid for by taxpayers, a quick guide is to see if the free market would/is already doing the activity without government involvement. If anyone can tell me where I can get a 140% loan-to-value (or more--"no appraisal required"!) private mortgage at 4% APR to buy a house, please let me know.

Another bailout. Great.

 

[MichaelB]

When I read the article this morning I recalled many threads here on refinancing including one recently where people indicated they would like to refinance and their banks would like to as well but they were restricted from making an offer – so the banks suggested missing payments to qualify. Go figure. My first thought was to post here – so many interested in refinancing. It never occurred to me that would lead to a discussion with such strong political overtones.

That’s unfortunate, and also a disservice to members not interested in politics. Please take your political commentary to the FIRE Related Political Topics where it belongs (when related to FIRE).

 

[samclem]

When I read the article this morning I recalled many threads here on refinancing including one recently where people indicated they would like to refinance and their banks would like to as well but they were restricted from making an offer – so the banks suggested missing payments to qualify. Go figure. My first thought was to post here – so many interested in refinancing. It never occurred to me that would lead to a discussion with such strong political overtones.

That’s unfortunate, and also a disservice to members not interested in politics. Please take your political commentary to the FIRE Related Political Topics where it belongs (when related to FIRE).

This is a fine and useful topic, I'm glad you posted it. Many readers will get direct benefit from it. I don't see how exploring its ramifications in full diminishes the subject.

 

[youbet]

I like the idea that only the amount currently owed is refinanced and that's at current, lower interest rates. And the borrower has to be up to date with payments and have a decent credit history. It seems like the borrower will be more likely after the refinancing to continue to make payments and dig him/herself out of the upsidedown situation.

 

[Texas Proud]

Samclem... most mortgages are in some kind of bond... sold to investors... banks do not hold them like they used to...


I wonder if the bond that holds the mortgage is going to hold the new one or if they are going to pay that off and put the refi loan in another bond If they keep it in the old bond, then there is a negative interest rate impact... if they put it in a new bond, then the possibility of default has moved from one bondholder to another... I would think they would have to disclose the info on the number of mortgages that are not covered by equity in the house... or something similar... OR, maybe FM is planning on holding it without selling it to the public....

I guess details to be announced later....


Over all, I would say this is a good program... lowering payments for people who can afford to stay in their house will likely result in fewer forclosure which can only help... and I am one who thinks that nothing the gvmt does will help much until the glut of housing is removed...

 

[harley]

When I read the article this morning I recalled many threads here on refinancing including one recently where people indicated they would like to refinance and their banks would like to as well but they were restricted from making an offer – so the banks suggested missing payments to qualify. Go figure. My first thought was to post here – so many interested in refinancing. It never occurred to me that would lead to a discussion with such strong political overtones.

That’s unfortunate, and also a disservice to members not interested in politics. Please take your political commentary to the FIRE Related Political Topics where it belongs (when related to FIRE).

I haven't seen a word on politics in this thread (unless y'all are moderating them out again). I have seen some discussion on whether this is a wise use of taxpayer money, a topic that seems directly related to FIRE and Money. Just because someone doesn't agree with you doesn't make it political. I think it's an excellent conversation, and killing it off won't serve anyone well.

 

[ERD50]

This is a fine and useful topic, I'm glad you posted it. Many readers will get direct benefit from it. I don't see how exploring its ramifications in full diminishes the subject.

I haven't seen a word on politics in this thread (unless y'all are moderating them out again). I have seen some discussion on whether this is a wise use of taxpayer money, a topic that seems directly related to FIRE and Money. Just because someone doesn't agree with you doesn't make it political. I think it's an excellent conversation, and killing it off won't serve anyone well.

+1

I'm confused how a thread about a federal program, involving federal regulators and Freddie and Fannie (The 'F' in each stands for 'Federal') can be discussed without some 'political overtone'? Politics is at the very center of it.

-ERD50

 

[harley]

Well, I guess the buying votes comment was political, but just because you're talking about a federal (or state or whatever) program doesn't imply the conversation is political. In these forums, political tends to be shorthand for partisan politics, which is unhelpful as well as obnoxious, and should be shut down. But talking about the value of a certain plan and whether it should be implemented is economic, not political. I haven't made my mind up on this one, so hearing from people with various opinions can be helpful and educational. Sometimes people point out viewpoints that I might not have considered on my own.

 

[ERD50]

https://personal.vanguard.com/us/funds/snapshot?FundId=0036&FundIntExt=INT

GNMA down just 1 penny today. I wonder if this sort of refinancing is big enough to affect the fund?

When mortgage refinance activity is high, the yield on the fund is likely to decrease.

-ERD50

 

[MissMolly]

Sam, you got me thinking. When I called Wells Fargo a year ago, which my originator, I was just inquiring about a regular refi. They told me to use the HARP. I told them I thought you had to be under water, and they said no. Looking back it seems like they were eager for me to use it. I was fine with it as it was cheap and a breeze to do, but they wanted to go that way originally not me. I wonder why.

Why? Because each time a HAMP or HARP workout is made, the lender is paid an incentive payment by the Treasury department.

These are not troubled loans and nobody is forcing banks to do anything. They are as anxious to refinance underwater mortgages as homeowners. The problem is lending rules don’t allow that in too many cases. All this does is let homeowners with negative equity have the same opportunity to refinance at a lower rate as other homeowners.

Allowing people with positive equity to take advantage of lower rates but denying people with negative equity the same opportunity is not sound economic policy.

Although lenders are not "forced" to do this, Fannie/Freddie keeps scorecards on all the lenders. The lender is given a "goal" of how many workouts they are expected to complete each month. If they fail to meet their goal, they've got some explaining they have to do to Fannie/Freddie.

Samclem... most mortgages are in some kind of bond... sold to investors... banks do not hold them like they used to...


I wonder if the bond that holds the mortgage is going to hold the new one or if they are going to pay that off and put the refi loan in another bond If they keep it in the old bond, then there is a negative interest rate impact... if they put it in a new bond, then the possibility of default has moved from one bondholder to another... I would think they would have to disclose the info on the number of mortgages that are not covered by equity in the house... or something similar... OR, maybe FM is planning on holding it without selling it to the public....

I guess details to be announced later....


Over all, I would say this is a good program... lowering payments for people who can afford to stay in their house will likely result in fewer forclosure which can only help... and I am one who thinks that nothing the gvmt does will help much until the glut of housing is removed...

They would be new loans. A lender cannot substitute a lower interest rate loan for an existing loan in a pool. The loan would have to be bought out of the pool (paid off) and then the new loan made and re-pooled.

 

[samclem]

The NYT has a short piece about the new program:

In part:

The plan also seeks to encourage banks and mortgage companies to participate by eliminating their legal responsibility for problems with the original loan, a significant financial benefit in many cases.

So, the new program will let the originators off the hook for any malfeasance (charitably called "problems" above--cute) regarding the original loan. One means of "holding Wall Street accountable" are the potential civil and criminal penalties for firms that deliberately broke the law in writing bad loans (liar loans, fraudulent appraisals, etc). This new proposal closes a door by which taxpayers might recoup some of our growing losses. Another gift, from our kids.

 

[Tractor guy]

Actually, this may be a gift to my kids. I think they may qualify for this. They are underwater on the starter home they bought 5 years ago. If they qualify, this will allow them to lower their mortgage rate & pay down their mortgage more quickly. It will bring them to the point of being able to trade up much more quickly.

I think that this is the right thing to do. The glut of unsold houses isn't going to be flushed out of the system until people are financially sound enough to start buying again. There have to be a lot of kids out there who are at the point in life where they need a bigger house but can't afford to sell the old one. The economy isn't really going to get into gear until this changes.

Lorne

 

[clifp]

My initial thought was this seems like a good idea. In fact, I've suggested it in the past. Now given that modest amount of my money, and roughly 1/3 of my mother's money is invested in Vanguard GNMA fund VFIJX I wondered what the impact would be to me and mom.

However, SamClem's comments and this WSJ Editorial really caused me to rethink my position.

The thinking is that this will reduce defaults. Or as FHFA said, "Such refinances bring benefits to borrowers, to housing markets, and to [Fannie Mae and Freddie Mac] and taxpayers."
Missing from that winners' list: investors who finance housing markets by purchasing mortgage-backed bonds. They will fund this new effort. Here is how: As homeowners refinance, investors who bought mortgage bonds will be given back their money and will have little option but to reinvest at far lower yields. The transfer is the difference in yield...

Granted, prepayment risk is inherent to mortgage bonds. There is also likely to be little sympathy for bondholders having to give up money to shore up housing. But that ignores that the government is picking winners and losers. Effectively, it is deciding some losses on some things are acceptable, say on 401(k) retirement plans, yet aren't on others, namely housing...

How much would this yield transfer hurt? I went back and checked, back in summer of 2007, 1 share of VFIJX was distributing .$.045 per month at share price that has been for decades $10 +/- $1 that works out to be 5.5%. Last month those same shares were distributing $.031 cents. This is a drop in income of almost 1/3. (Now it is nice that price is of VFIJX is now over $11, but pretty much irrelevant to mom and I) The impact on my mom is no different than a working family where they took paycut or saw their hours reduced. There is less money to spend.

Well ok so maybe Mom and I will need to take one for the team, cause as ERD suggests (and it was my initial thought also) the folks with underwater mortgages will spend the money stimulated the economy. Plus ultimately we do have to fix the housing crisis for their to be full recovery.

But the articled included this little tidbit.

Another unsettling wrinkle: The FHFA is adding an incentive for borrowers to refinance into shorter-maturity mortgages. But in many cases, this will mean a borrower's monthly payment, including principal repayment, won't decline. It may actually rise. That undermines the notion that these borrowers are unable to meet monthly payments and need government assistance.

In fact virtually all of the discussion we've seen about refinancing recently (ok Nords is an exception) involved getting a shorter loan. Given that people doing the refinance are by definition current, some percentage can actually afford a higher payment. If you have 6.5% 30 year and refinance into 3.5% 15 year your payments only increase by 12%, many folks in their 40s and 50s probably are rethinking the wisdom of retiring with a mortgage.

So when we look at the whole picture this is not nearly such a great idea. The lower yields on GNMAs, means Mom and I have less money to spend. The folks who refinance to short loans also have less money to spend. So why is this a good idea again?

One interesting thing about this forum is that we are for the most part prodigious savers. As group we saved long before it became trendy to do so. . The last few years the Fed and most politicians have declared open season on savers, especially the most risk adverse (this does not include me.) As a class. we savers really have nobody speaking out for us. Yet when a proposal like this which is pretty much a direct transfer from our pockets to borrowers, we applaud it. (Except for SamClem) FYI Vanguard Total Bond fund has 30% mortgage securities so all you VBTLX holders this hurt you too. Now admittedly the impact for us savers is probably quite small maybe 10 basis (wild ass guess) but collectively it is pretty significant.

Now maybe this isn't a big enough deal to Occupy Washington over, but do we really have applaud those who are trying to reduce our income?