Have you heard the Great Mortgage ReFi Rumour of August 2010?
Now that the US Treasury’s Hamp programme is widely recognised as a failure, attention is turning to new efforts to reinvigorate the lagging American housing market. To wit, recent whispers that the US government’s latest mortgage modification effort will take the shape of a mass refinancing.
Specifically, that US homeowners with Fannie Mae and Freddie Mac-sponsored loans are about to receive an offer to lower their mortgage rates below current market rates.
And you can kind of see the logic, given that former Fed chairman Alan Greenspan has recently and very publicly pronounced the latent US recovery depends on the direction of house prices.
But as blogger Bruce Krasting points out — in slightly more colourful language than allowed here on FT Alphaville — a mass refinancing would mean sticking it to non-GSE borrowers and mortgage investors.
As he puts it:
The “fairness” issue I thought was important, is in fact a non-issue. This is not a solution to the nation’s housing problems. Fairness is not the objective. It is a way to protect the GSEs. It is the equivalent of a CDS purchase by Treasury. They are paying the GSE borrowers not to default. From this perspective the Mega ReFi plan has better optics. It might even make some sense. But it is still a screwy idea. The fact that it is even being discussed (including some of the ulterior motives) is a measure of just how desperate the thinking has become.
But before we get too carried away with the US government’s determination to save US housing — here’s an alternative point of view, courtesy of Deutsche Bank’s Steven Abrahams.
As Abrahams notes, mass mortgage modification would benefit current borrowers, but it would come at a cost — both to the mortgage investors and future mortgage borrowers.
Here’s what he says:
The collapse of housing and the tightening of underwriting standards has led to strikingly low prepayments in the 2006–2008 vintages of agency MBS, and it is the rare portfolio that has underweighted those assets. But almost every investor raises the specter of some government effort—mass modification of loans, blanket principal forgiveness, sudden mandated easing of underwriting standards—that somehow brings it all to a quick and brutish end. The odds of disaster implied by manager allocations to these impaired vintages: vanishingly low. But at an average price on fixed-rate pass-throughs of $106–24, even small changes pose a threat.
Although incremental changes over time to underwriting look plausible, some systemic effort to hit the mortgage reset button faces two big hurdles: the cost today, and the cost tomorrow. U.S. households have lost $6.4 trillion in real estate value since mid–2006, according to Fed data, so the cost today to fix that obstacle to refinancing is clearly high. The cost of repairing equity may be particularly high for a government newly sensitive to fiscal discipline, and probably too high to cover much beyond a small part of the problem. And then there’s the cost tomorrow. Although mass modification of mortgage note rates to current 30-year 4.50% levels would improve borrower cash flow and ease credit risk and be wildly popular with people that already have loans, the price would likely be paid afterwards by all prospective new mortgage borrowers. Few surviving MBS or loan portfolios would have an appetite to reinvest. And the market would need to reprice to reflect continual efficient callability.
But — never say never.
Deutsche Bank seems to have got that desperation memo too . . . advising clients thus:
Despite the obstacles to hitting that reset button, implausible does not mean impossible. Investors ideally need a leveraged option to hedge the risk of an idiosyncratic shift in prepayments. Stay tuned.
Related links:
The slow death of Hamp, the summer of delinquencies – FT Alphaville
US Housing Bubble v2.0, charted - FT Alphaville
Hamp-lified, moral hazard outrage du jour – FT Alphaville