Refinance rules change for some underwater mortgages

[youbet]

I think it was your characterization of solid, contributing comments and discussion as being "complaints."

It's true, listing the negatives to any action can seem like "complaining." Especially when the negatives might border on trivial. Still, I like to read about all sides of an issue and hate to see contributors shushed.

But ERD50 can speak for himself........

[ERD50]

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Originally Posted by MichaelB By correcting a misleading new report

That's fine, and welcome. I want the correct, up-to-date info.

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or challenging the contention that refinancing is an issue?

That's one. It is an issue. The extent is tough to say, but that's what we are trying to flesh out here.

And let's not ignore the effect of changing the rules mid-stream on investors (again, as youbet points out). That could have some long-term and complex consequences.

-ERD50

[MichaelB]

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Originally Posted by clifp I think you are missing the point why should this group have additional income at the expense of my Mom and all the other purchaser of MBS? Assuming you are right and it is 2% of the mortgages which will be replaced with much lower interest. This represents several hundred dollars a year to my mom in lower GNMA interest, more than negating her SS increase next year. She has already suffered roughly a $500/month loss income due to drop in mortgage interest rates. Now this part of the risk she took with investing in these securities, if interest rates drop she was going to lose income.

It is possible I am missing the point. Why should this 2% should be denied the same opportunity to refinance all other mortgage holders have? This refinancing does not cause a loss in yield, it does result in a premature return of capital.

[clifp]

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Originally Posted by Texas Proud I agree with this... according to the numbers on the news last night, this will only affect 400K ish from one estimate up to 2 mill from another... Yet, we have 6 million people either being forclosed on or about to be foreclosed... And to an investor of bonds.... would you not want to get rid of a possible walk away or foreclosure All these loans have a higher probablility of a foreclosure... I would rather get rid of them from my portfolio.... now, being in a GNMA fund does not accomplish that, but the change is probably not even 1 BP... let alone 10....

I think this is rather significant amount of money. The most common estimate I hear is this will help 1 million people, if they refinance an average 300K loan (they are underwater so they are presumably larger than average) and save 2% interest. This is 6 billion interest expense they save per year and the investors lose. The total GSE sponsored mortgage pool appears to be around $3 trillion (I am not sure how to interpret this table)

If we assume an average interest rate of 5% that gives a total of $150 billion in total mortgage interest, for eligible mortgages. a $6 billion drop is the equivalent of 4%. So for the person with $100K in Vanguard GNMA that is $130/year. For the mythical investor with $500K in the Vanguard Total Bond Index it is $200/year. I think I am in the right ball park since then yield on the GNMA dropped by 10% after news hit.

One of the irony is that defaults don't bother GNMA investors, since after the take over of Freddie/Fannie all of the mortgages are guarantee by the full faith and credit of Uncle Sam. So loses will be spread out over the whole population. Mom in no small part because of her drop in income pays a very modest amount of Federal Taxes.

[MichaelB]

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Originally Posted by youbet I think it was your characterization of solid, contributing comments and discussion as being "complaints." It's true, listing the negatives to any action can seem like "complaining." Especially when the negatives might border on trivial. Still, I like to read about all sides of an issue and hate to see contributors shushed. But ERD50 can speak for himself........

The only thing I characterized as a complaint was about impact to MBS investors. Nothing else. Notwithstanding clifp's mother as an example, this has not changed.

[clifp]

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Originally Posted by MichaelB It is possible I am missing the point. Why should this 2% should be denied the same opportunity to refinance all other mortgage holders have? This refinancing does not cause a loss in yield, it does result in a premature return of capital.

Oh so there is inalienable right to refinance a mortgage.
Let see the guy who lost his job can't refinance, nor the couple that divorced, maybe not even the small business owner who's income dropped 30%. Probably even the little old lady who is depending on income from her investments and saw it drop by 1/3..

Lots of people can't refinance the whole concept is that you have to re qualify for the loan. A secured loan (aka mortgage) has two components is the borrower willing and able to pay back the loan?, and is there sufficient collateral so that the lender can be made whole if they default. You need both aspects This is banking 101.

Of course this causes a loss of yield; in my GNMA mortgage pool I have some 6.5% mortgages many have refinance but not all, everytime somebody with a high interest rate loan refis the GNMA Fund managers have to reinvest that money. People won't borrow money at 6.5% for a mortgage anymore. Hence the yield drops.

[ratto]

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Originally Posted by ERD50 So there are two questions to this proposal: 1) will this plan (since it only affects a small number of mortgages) really have a positive affect on the economy? -ERD50

Maybe or maybe not. It depends on how success of the economy is sampled & measured by statisticians serving at the pleasure of an administration.

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Originally Posted by ERD50 2) Is it 'fair' to make a deal for one group that hurts another group, if even by a small amount (since it only affects a small number of mortgages)? -ERD50

It's probably 'fair' to say that this is a classic case of zero sum game.

[Texas Proud]

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Originally Posted by clifp I think this is rather significant amount of money. The most common estimate I hear is this will help 1 million people, if they refinance an average 300K loan (they are underwater so they are presumably larger than average) and save 2% interest. This is 6 billion interest expense they save per year and the investors lose. The total GSE sponsored mortgage pool appears to be around $3 trillion (I am not sure how to interpret this table) If we assume an average interest rate of 5% that gives a total of $150 billion in total mortgage interest, for eligible mortgages. a $6 billion drop is the equivalent of 4%. So for the person with $100K in Vanguard GNMA that is $130/year. For the mythical investor with $500K in the Vanguard Total Bond Index it is $200/year. I think I am in the right ball park since then yield on the GNMA dropped by 10% after news hit. One of the irony is that defaults don't bother GNMA investors, since after the take over of Freddie/Fannie all of the mortgages are guarantee by the full faith and credit of Uncle Sam. So loses will be spread out over the whole population. Mom in no small part because of her drop in income pays a very modest amount of Federal Taxes.

You do not take into account the people that might just walk away from their mortgage because they are under water and can not refinance... this is a very hard number to pin down, but it is not zero...

So, what would happen to your yield if 5% of these mortgages would be foreclosed if this program did not go into effect and would not if they refi... I think more than the yield you are losing with lower interest loans....

[ERD50]

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Originally Posted by ratto Maybe or maybe not. It depends on how success of the economy is sampled & measured ....

It may be a good thing for the economy overall, off-hand, I think it would be a very tough thing to measure/determine, even w/o any 'spin' applied.

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It's probably 'fair' to say that this is a classic case of zero sum game.

I guess the interest rate difference is a zero-sum, it helps one side and hurts the other. But, if it actually helps the economy (and I can't say it will/won't) that could be a slight win-win.

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Originally Posted by Texas Proud So, what would happen to your yield if 5% of these mortgages would be foreclosed if this program did not go into effect and would not if they refi... I think more than the yield you are losing with lower interest loans....

Regarding GNMA, look at clifp's earlier post. These are backed by the Feds, foreclosures do not affect the GNMA as I understand.

Bigger picture, I don't know if that backing comes out of the mortgage payments themselves (like PBGC backing comes from the pension funds it covers), or if it comes out of the Feds general funds. If it is out of general funds, then it is all a big shell game, and the taxpayer pays either way.

-ERD50

[brewer12345]

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Originally Posted by ERD50 Regarding GNMA, look at clifp's earlier post. These are backed by the Feds, foreclosures do not affect the GNMA as I understand. -ERD50

Defaults in a GNMA pool have the same effect as a refi as far as the investor is concerned.

[Finance Dave]

Sorry I have not read all posts, so excuse me if duplicated.

The downside I see is that our gov't again is picking winners and losers, and providing a benefit to one segment of the population at the expense of others.

I think that the reduced revenue from these revised loans will be borne by all other customers of those same banks. Perhaps they could add something that gives the money back to the banks later? For example, go to longer term loans, essentially stretching out the payments to get the loan more affordable without reducing overall fees?

[Texas Proud]

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Originally Posted by ERD50 Regarding GNMA, look at clifp's earlier post. These are backed by the Feds, foreclosures do not affect the GNMA as I understand. Bigger picture, I don't know if that backing comes out of the mortgage payments themselves (like PBGC backing comes from the pension funds it covers), or if it comes out of the Feds general funds. If it is out of general funds, then it is all a big shell game, and the taxpayer pays either way. -ERD50

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Originally Posted by brewer12345 Defaults in a GNMA pool have the same effect as a refi as far as the investor is concerned.

Yep... wasn't thinking just of GNMA when I wrote it, but if you are in a GNMA fund you don't have expose to the other mortgage bonds...

[youbet]

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Originally Posted by Texas Proud You do not take into account the people that might just walk away from their mortgage because they are under water and can not refinance... this is a very hard number to pin down, but it is not zero... .

But we do have to consider that the folks who qualify for refi under this new program are people who have been making their payments. It excludes the group who has stopped making payments and are just squatting in their properties waiting (and possibly waiting a looooong time) to be tossed out. It's the later group, IMO, that are the likely ones to strip out the fixtures and copper and walk away.

But, as you say, a hard number to pin down and purely speculative.

[samclem]

Does it help the economy? I dunno. Clifp's mom and lots of others lose money for every dollar that doesn't get paid according to the previous loan, so that's money that she won't be spending and generating jobs.

The problem with the housing market is that a lot of folks are stuck in houses that are underwater. They can't move and take new jobs because they can't afford to pay off the loan. This proposal doesn't help them a bit--they still owe just as much as they ever did. They'll be able to move on only when they either 1) default on the loan, take their hit and move on to pick up the pieces or
2) Economic growth picks up leading to RE appreciation so that their home's value equals the balance due on their mortgage.

People get themselves in negative equity situations for all kinds of reasons (see Nords' post). The market deals with it. It causes hardship for many. Just exactly why is it the government's business to pick winners and losers this time, putting taxpayers at risk (somebody's gonna guarantee these new loans--the ones being written without regard to the home's value and the borrower's ability to pay, and without the higher interest rate such a risky loan ought to carry) and hurting the buyers of MBS who also "played by the rules. . ."

[Gatordoc50]

IMO this is to target post bubble mortgages, nearly all of which were backed by Fannie and Freddie. We have all these mortgages between 2005 and 2009 which required only 3% down and thus are underwater. Interestingly, many of these homes were foreclosures. This may help prevent having to foreclose on the foreclosures.

[foxfirev5]

I can really feel both sides of this issue. Worked hard, saved like mad and paid off two houses, now worth little more than I paid years ago. At least there's no mortgage. Now I'm ready to retire. GNMA fund, TBM fund, and 1.75% 5yr CD's. Not so fast.
Two of my kids have homes bought since 2005. I had no idea one had one of those 80/20 mortgages with a 5 yr balloon. We got through that with $$$ and falling interest rates. Both are underwater but I am confident they will pay them off. Of course anything can happen.
My inclination is that if I can work through it with very limited resources why can't everyone. However I also know its not that simple.

[clifp]

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Originally Posted by brewer12345 Defaults in a GNMA pool have the same effect as a refi as far as the investor is concerned.

Brewer is right, when defaults happen. Freddie/Fannie pay off the investor and then, the GNMA fund manager has to reinvest the money at a lower interest rate.

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Originally Posted by samclem People get themselves in negative equity situations for all kinds of reasons (see Nords' post). The market deals with it. It causes hardship for many. Just exactly why is it the government's business to pick winners and losers this time, putting taxpayers at risk (somebody's gonna guarantee these new loans--the ones being written without regard to the home's value and the borrower's ability to pay, and without the higher interest rate such a risky loan ought to carry) and hurting the buyers of MBS who also "played by the rules. . ."

Samclem raises an important point what happens to these new loans at a lower rate. Does Fannie bundle them and sell them to investors or does Fannie keep them on their books? If Fannie sells them who is in the market to buy a bunch of 15 to 30 year loans that pay 3.5-4.5% that are all at least 25% underwater? At least at 6.5% rate the investor/Uncle Sam is get some compensation for these risky loans.

On the other hand, the lower interest rates are causing people like Lostgator to at least consider selling off assets to make themselves eligible for a refinance. I doubt he would consider selling his beach lot, if the government gave him an opportunity to refi without coming up with additional funds. I'd argue that for people like him who are overleveraged that this program encourages them to remain that way and this is not a good thing.

[MichaelB]

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Originally Posted by clifp Oh so there is inalienable right to refinance a mortgage. Let see the guy who lost his job can't refinance, nor the couple that divorced, maybe not even the small business owner who's income dropped 30%. Probably even the little old lady who is depending on income from her investments and saw it drop by 1/3.. Lots of people can't refinance the whole concept is that you have to re qualify for the loan. A secured loan (aka mortgage) has two components is the borrower willing and able to pay back the loan?, and is there sufficient collateral so that the lender can be made whole if they default. You need both aspects This is banking 101.

Nothing said about inalienable rights. This is about the opportunity to refinance. There were rules in place discouraging lenders and impeding borrowers. Removing the rules to let the lenders and borrowers make a better deal. They both want this.

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Originally Posted by samclem Does it help the economy? I dunno. Clifp's mom and lots of others lose money for every dollar that doesn't get paid according to the previous loan, so that's money that she won't be spending and generating jobs. The problem with the housing market is that a lot of folks are stuck in houses that are underwater. They can't move and take new jobs because they can't afford to pay off the loan. This proposal doesn't help them a bit--they still owe just as much as they ever did. They'll be able to move on only when they either 1) default on the loan, take their hit and move on to pick up the pieces or 2) Economic growth picks up leading to RE appreciation so that their home's value equals the balance due on their mortgage. People get themselves in negative equity situations for all kinds of reasons (see Nords' post). The market deals with it. It causes hardship for many. Just exactly why is it the government's business to pick winners and losers this time, putting taxpayers at risk (somebody's gonna guarantee these new loans--the ones being written without regard to the home's value and the borrower's ability to pay, and without the higher interest rate such a risky loan ought to carry) and hurting the buyers of MBS who also "played by the rules. . ."

Not sure if it helps the economy, but nobody said that was a requirement. It definitely does help homeowners stuck with negative mortgages by lowering the cost and letting them stay until they can sell once again. The gov't is not picking any winners or losers here. Just letting two parties get together.

[MichaelB]

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Originally Posted by clifp Samclem raises an important point what happens to these new loans at a lower rate. Does Fannie bundle them and sell them to investors or does Fannie keep them on their books? If Fannie sells them who is in the market to buy a bunch of 15 to 30 year loans that pay 3.5-4.5% that are all at least 25% underwater? At least at 6.5% rate the investor/Uncle Sam is get some compensation for these risky loans.

I would assume new loans will be packaged and sold as new MBS at market rates. If new investors are willing to accept the lower rates, that is how they should be priced. Market forces and all...

[brewer12345]

So what happens if you are otherwise eligible but also have a second on the house?