According to Federal Reserve Chairman Ben Bernanke, although problems still exist (think unemployment and sagging home prices), “the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years” and the Chairman remains “optimistic” as the U.S. economy grew at a 1 percent pace in the second quarter of 2011, down from a previously estimated 1.3 percent.
And while Bernanke set the stage for more stimulus back in July, he didn’t signal any intent to let the stimulus players take the stage at this point but implied the curtain, or at least script, could be raised next month.
here’s hoping the idea of a mass refi for all Fannie/Freddie mortgages gains some traction.
http://nationalmortgageprofessional.com/news-ticker/08/11/us-govt-sponsored-mass-refi-boom-4
Of course the real solution would be just bite the bullet, write down the principle, admit that they banks are insolvent, unwind them one by one under the FDIC and move the eff on.
But of course, that isn’t going to happen, because everyone loves watching a good zombie movie.
BB got an important lesson: no stimulus, but the market didn’t crash and the world didn’t end.
I wonder how this will affect his future decisions in light of the fact that other stimulus measures here and in Japan had little beneficial effect in comparison to their costs.
So now, the real estate market can continue its inevitable descent. The government is out of money and the fed is out of ammunition.
This would be great! Saving 1%/year for doing nothing … why not?
That would put tons of money into consumers’ pockets and some of that would flow into the economy. It would be a great stimulus for the middle class, which is exactly why it will never happen in a million years.
@Tipster – One could argue that the markets (since they are forward looking) got a boost from BB’s suggestion of future stimulus, something the market’s and the financial press are all clamouring for at the moment.
The government is certainly not out of trade policy ammunition or internal policy ammunition. It just refuses to make any changes.
the govt also isn’t “out of money”. last time i checked they could print at their hearts content. there is no such thing as the U.S. govt running out of U.S. dollars.
^No political will. Government is out of money.
“here’s hoping the idea of a mass refi for all Fannie/Freddie mortgages gains some traction.”
Why would this be a good thing? Doesn’t that just mean that lots of government guarantees will be called in because the principal amounts will still be ridiculously high? This would basically be TARP II: The Banksters Laugh Again, only without eligibility criteria.
I like your de-zombiefication idea, but I agree that it won’t happen.
The Refi’s would be a good thing because, instead of individuals having to go to the banks to refi, (many of which appear to be giving owner’s the run around and don’t seemed interested in letting most owners refi) Fannie and Freddie would just drop the rate on every mortgage they own lowering millions of people’s monthly payments and giving those individuals more cash in their pockets to accelerate household deleveraging and pumping up consumer spending and accelerating us out of this ‘soft patch’.
and it can happen without congressional approval. It just needs approval of the guy assigned to oversee Fannie and Freddie since they are currently owned by Federal government (aka the American tax payer aka you and me)
So instead of bailing out wallstreet, the mass refi would truly be a bailout of mainstreet, or at least a big chunk of mainstreet.
Why don’t we just give free houses to everyone? Why should anyone ever have to pay off a mortgage? Or any debt they take on, for that matter?
@Legacy Dude … I would be very happy to see the banks admit their losses, write down the billions in principle losses that they have incurred by writing bad loans to people who could never repay them, admit they are insolvent, get liquidated by the FDIC and we all move on.
But since they isn’t going to happen, the next best thing appears to be allowing current owner’s refince their Fannie and Freddie owned mortgages at the today’s current low rates.
The mass refi is NOT giving people a home or even principle forgiveness. It IS streamlining a refi process that the banks seem reluctant to engage in, allowing people to keep paying on the loan they took out but just at a lower rate, instead of declaring bankruptcy and going into foreclosure (which IS walking away from debt)
The positive is that it would also give them more cash every month to increase their own ability to pay down other debt (deleverage) or to pump that money back into the economy through additional spending/investment.
tipster – a big reason why there is “no political will” is because policians and most americans actually believe your original statement – that the US is “out of money” or can run out of money. It can’t. If this were understood, and it was understood that spending cuts are economically equivalent to tax hikes, then we could get rid of the fear mongering that is guaranteeing that we will be going back into recession, if we ever got out of it in the first place
Yeah, no relief for regular people! Although I do wish I could be treated like the banks, I’d love to use my crappy collateral (an underwater house) to borrow money at ~0% from the Fed and then loan it to the US government at 2%.
Legacy Dude, that’s the thing, it would be a refinance, not a principal reduction. People with underwater mortgages would still have to pay the same principle; they’d just be doing so at a lower rate of interest.
They’d be able to do the refinance themselves without this program if their LTV was lower, but of course it usually isn’t.
It’s not clear that these Refi-fests make good policy from a consumer point of view. Defaults seem to be most correlated with a negative income shock (job loss,…) and being underwater on the home price. Refi’s usually add fees, either paid explicitly or wrapped into the balance, and reset the amortization clock. Both of which seem to increase the probability of default.
If consumers saved the increased cash flow due to the refi, that might improve consumer balance sheets but they mostly seem not to. (And if they did save rather then spend then you wouldn’t see the stimulus that some people seem to want out of this).
Early in the crisis some espoused a plan of refi-ing people from ARM’s to fixed and then attempting to run high inflation to ease the debt burden. But it’s far from clear that even if fiscal an monetary policy could be co-ordinated in this way, that consumer debt could be inflated away without also creating other serious economic problems.
@ hangemhi — Pretty much everyone realizes that the US has a printing press. But the paper is only worth something so far as foreign and domestic parties trust it as a claim on some good or service of real value. Historically, lots of countries with printing presses have gotten in all manner of monetary disasters.
The problem with Fannie and Freddie arbitrarily reducing interest rates (or refinancing) is that this is not a no harm, no foul event. Fannie and Freddie do not own the loans, but instead merely back the loans. Reducing interest rates on these loans will have all sorts of negative ramifications to our banks (something most people might think a good thing), our public and private retirement systems and our foreign creditors. So while it might play politically, the effects of such a move could be significant.
The mass refi proposal would be good policy from a consumer point of view when compared with doing nothing and letting the current state of affairs go on.
Even with fees, it would reduce the payments people have to make and thus make more money available to consumers. If I were in charge of the program, I’d do something explicitly so that the oily fly-by-night mortgage brokers wouldn’t get any fees or commissions; after all Fannie and Freddie own the loans and the government owns the GSEs.
I haven’t seen anything that said underwater homeowners would simply save the difference. Please provide a link.
Not that I think this would be a good idea in an absolute sense; it massively increases moral hazard. But once you buy into the idea that an intervention is a good thing, this seems better than what’s going on now.
“The mass refi is NOT giving people a home or even principle forgiveness. It IS streamlining a refi process that the banks seem reluctant to engage in, allowing people to keep paying on the loan they took out but just at a lower rate, instead of declaring bankruptcy and going into foreclosure (which IS walking away from debt)”
That’s the problem though. Walking away is good for our current situation — it means credit gets destroyed and someone else who is more responsible gets a cheaper house. Allowing a mass refi seems to be more extend and pretend, and people with mass debt loads will continue to default (as they did under TARP).
I appreciate that maybe there is some distributive justice in that this more directly helps individuals as opposed to banks, but it also helps banks quite a bit. However, the distributive justice doesn’t work within the group of individuals because this idea tends to help irresponsible people more than responsible people. That still creates a significant moral hazard problem.
” have all sorts of negative ramifications to our banks (something most people might think a good thing),”
It depends on how this is done, but I’m mostly certain that this either explicitly or implicitly would move the risk of the affected loans from the banks to the government. Since these are already bottom of the barrel loans (People who haven’t already been able to refi) many of which would incur losses anyway, it’s probably a net positive for the banks.
Considering this and the fees incurred, any tears by the banks are probably crocodile tears.
“I haven’t seen anything that said underwater homeowners would simply save the difference. Please provide a link.”
I’m saying just the opposite, the money would probably *not* be saved. A policy that doesn’t improve consumer balance sheets and may slightly increase default rates at the cost of the government assuming more loan risk doesn’t seem all that great.
Guest666, guess what? The Emperor Wears No Clothes!
Mortage-backed securities were in fact a lot risker than they were sold as being, and the sooner everyone is forced to recognize this fact and take that already-present risk into account accordingly, the better. From the editorial in the New York Times:
What you outlined would be an added beneficial side effect of the mass refi program.
tc_sf – most attendees at weddings with open bars don’t get blind drunk just as most countries with printing presses don’t experience hyperinflation.
and in our current economic situation we are cutting back on the drinks/water when the population is dying of thirst.
tc_sf, I just don’t agree with your contention that the proposed program wouldn’t improve consumer balance sheets, where the group of consumers under discussion are those with higher-than-prevailing interest rate underwater mortgages.
If someone refinances at a lower interest rate, then the amount of total debt they have outstanding is reduced. That improves their balance sheet by reducing their outstanding liabilities by the difference in the amount of pure interest payments they would have had to make.
Also, if they don’t “save” the difference and instead spend it, like the Times editorial I quoted above said, we benefit because consumer spending is 70% of overall economic activity and the economy expands.
If consumers pay off other debt (such as high-APR credit card debt) with the amount they aren’t usually responsible for sending into a mortgage loan servicer every month, then of course that also improves their balance sheets by reducing their liabilities.
“Mortage-backed securities were in fact a lot risker than they were sold as being, and the sooner everyone is forced to recognize this fact and take that already-present risk into account accordingly, the better.”
That just means interest rates should be higher, not lower. I would be happy if we had market interest rates right now — 4% is not a market interest rate.
“I’m saying just the opposite, the money would probably *not* be saved. A policy that doesn’t improve consumer balance sheets and may slightly increase default rates at the cost of the government assuming more loan risk doesn’t seem all that great.”
The fact that it’s not saved is not really that objectionable, considering how much our GDP is dependent on consumption.
“most attendees at weddings with open bars don’t get blind drunk just as most countries with printing presses don’t experience hyperinflation.”
Especially countries that are reserve currencies. Furthermore, there’s still tons of credit destruction going on, which keeps inflation in check. People have been saying for 4 years that hyperinflation will happen, despite the headwinds against it. Why are they suddenly right this time?
“Mortage-backed securities were in fact a lot risker than they were sold as being, and the sooner everyone is forced to recognize this fact and take that already-present risk into account accordingly, the better.”
That is definitely true. And the way to do this is to allow the foreclosure processes to proceed. Of course, with this and with all other “solutions” we will see insolvent banks, insolvent pension systems, and irate creditors.
I’m not saying we should try and avoid the pain, I think we’ve created an even bigger problem by encouraging companies and individuals to believe the government can bail them out. The foreclosure process can be difficult emotionally, but in many (most?) cases it is the best decision for the individual and the worst for the bank/investor. Refinancing existing mortgages at lower interest rates does solve the problem of underwater homeowners.
oops,
does NOT solve the problem of underwater homeowners.
sfrenegade wrote:
Sure. And if/when the mass refinance happened, existing investors in mortgage backed securities would take either a capital loss or a loss in expected coupon payments or in all probability both.
I see where you’re going, though. The next time a bank or banks wanted to sell some mortgage backed securities, the market would demand a much higher interest rate, as you suggest, to compensate bond buyers for the now-quite-apparent risk. That’d be an interesting experiment to see what would happen vis a vis The Fed’s operations to mortgage interest rates overall.
“does NOT solve the problem of underwater homeowners.”
Agreed, I proposed agree with the concept of mass refi’s less as a solution to underwater homeowenr’s but more as a way to add stimulus to the economy that does NOT require congressional approval.
And while refi’s will not solve the problems of many underwater homeowner’s an improved/improving economy would certianly help them, and the rest of us as well.
On this we agree, in theory. However, in the real world, banks don’t have to foreclose in any given time frame and they aren’t so they don’t have to recognize a loss and/or mark-to-market.
I personally know people who’ve moved out of their house because they were behind on their mortgage, leased out the place after they moved, and are still collecting rent eighteen months later and the bank hasn’t yet foreclosed. This shouldn’t happen, but it does and is.
You’re arguing the normative economics position. What this proposal is about (easing refinancings for underwater homeowners whose loans are owned or backed by Fannie Mae and Freddie Mac) is coming from the practical position.
As I understand it, the “government guarantees” that could “be called in” that sfrenegade mentioned at 11:05 AM come into play when a borrower default happens. With this approach, the borrower refinances, which still means the buyer of the mortgage backed securities takes a hit but everbody involved avoids the default. Another side effect is that CDS holders don’t get paid.
Brahma,
Unfortunately, I am too cynical to believe that any sort of program to lower interest rates would/could be administered in such a way as to prop up the economy. And what about the “fairness” aspect where someone who had a bank portfolio loan doesn’t get the same treatment, or where someone who actually felt it was appropriate to put money down on a purchase isn’t eligible? It is a very slippery slope when we start cramming down certain loans and not others.
I think I prefer the “take the pain now and reset” approach although it would no doubt lead to a pretty significant downturn in housing values and equity/bond values. And if we weren’t playing games with mark to market, this would have already occurred.
I don’t usually do this since I try not to be a grammar troll, but since I see people using both in the same post I’m going to guess this might be helpful:
http://www.diffen.com/difference/Principal_vs_Principle (or click name link)
It’s “principal” balance. Even if you use it as a noun as in “pay off the principal.” 🙂
One proposal being floated just allows a GSE backed mortgage to refinance to a lower interest rate, not because the homeowner is underwater but because they don’t have the credit score to refinance.
It’s hard to argue with that. The government is already on the hook if they default, and this just lowers their interest rate making the government backed mortgage less likely to default. Yes, they shouldn’t qualify, but they already DID qualify and the government is ALREADY on the hook for the loan, so it’s hard to see why the government wouldn’t be better off.
It screws the holder of the mortgage, who right now has the trifecta of a too-high interest rate, trapped homeowner, and a government guarantee, so it will probably never happen.
So instead of bailing out wallstreet, the mass refi would truly be a bailout of mainstreet, or at least a big chunk of mainstreet.
Well that’s just backwards and un-American.
I am trying to figure out how this would work:
Govt will allow home owners to refinance at a lower rate. So, these would be new mortgages. They will sell them to new investors and pay off the old investors holding the old security?
If that is the case, only entity that will lose is the new investor. If that new investor happens to be the government holding the mortgage in its books, then we all lose.
I’m not an expert on structured finance, but just going on what I’ve read, and with the caveat that there are all kinds of variations on a theme that go into a residential mortgage-backed security (which is to say that the details can and do change from security to security, even on similar kinds of underlying loan pools), I don’t think you can assume that “the old investors holding the old security” are going to be paid off.
Not having seen the details of the proposal, it makes the most sense to me that the holders of some securities are going to be paid off, just as they would in any normal situation where the borrower prepays. This is usually going to be the “senior” and “mezzanine” tranches due to the usual prioritization of payments.
I’m guessing that holders of securities from lower, “junior” tranches would probably take a severe haircut or be wiped out, again, depending upon how the prepayment risk was allocated. As the N.Y. Times editorial says, the holders of this paper knew it was higher risk and were being compensated for it.
Thanks Brahma for some clarification.
In that case, wouldn’t the holder who gets the haircut fight against the refinancing. He might have gotten compensated by govt by some other means, but still I would assume these investors (assuming they are banks) would squeeze as much as possible to get more.
Similar to how S&P termed Greece was technically default (same principal but buying new longer term bond), this change could make the homeowner technically default. Wouldn’t that hurt his credit history??
I think the devil is in the details.
SFwatcher wrote:
Yes, but legally it’s not at all clear if they have the standing to put up a fight, at least in court. Of course, I haven’t see the contracts underlying these securitizations and I’m not a lawyer so even if I had my opinion wouldn’t mean much.
That all said, the FAQ for one of the relevant proposals put forward by R. Glenn Hubbard et. al. last year and apparently presented at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming this year doesn’t mention the legalities, but it does say this:
Emphasis added.
So there you have the counterargument. It’ll be interesting to see what becomes of this, if anything, even if it does cut against my personal interests because I want more foreclosures to happen so that the general housing price level falls to a place more in line with household incomes.