When President Obama addressed the Congress over a week ago, he stated his intentions to work with the Government-sponsored enterprises, Fannie Mae and Freddie Mac, to create guidelines to help more homeowners refinance out of high interest rate mortgages to a low interest loans. The president's mortgage refinancing plan could put an additional $2,000 or more in the pockets of millions of homeowners.
The proposal aims to re-design the Home Affordable Refinance Program (HARP) to make more borrowers eligible to refinancing their homes. Only mortgages closed before June 2009, and guaranteed or purchased by either Fannie or Freddie, meet the criteria for the HARP program.
With just 838,000 borrowers able to refinance their mortgages under the original program, HARP has been a massive disappointment because its numbers have not come close to the nearly 4 million borrowers the Treasury expected to refinance to lower interest rates.
Some industry watchers believe the eligibility criteria for borrowers curtail the number of homeowners able to qualify for refinancing. One main impediment is the loan-to-value (LTV) ratio requirement. The current rules prohibit lenders from making loans on homes exceeding 125 percent of the homes' market value. The problem? Many homeowners are significantly underwater with their mortgages.
Mortgage bond investors -- a casualty of any refinancing plan put forth, have apprehension about the refinancing proposal. When homeowners refinance from high interest rate to lower interest rate mortgages, investors will miss the amount of interest expected when they purchased the MBS.
The CBO Study
According to a study by the Congressional Budget Office, the program could move $13 to $15 billion from mortgage backed security investors to borrowers who refinance their mortgages. Housing and mortgage analysts estimate the mortgage backed security market at around $5 trillion.
The mortgage refinancing aspect of the economic stimulus plan makes two assertions: borrowers who have loans insured by Uncle Sam can refinance to low interest rate loans to avoid default and the borrowers will have more income to spend on other items and help stimulate the stagnant economy.
The cost-benefit analysis, conducted by the Congressional Budget Office, reports $2.9 borrowers will refinance their mortgages with 111,000 less defaults. The total cost saving on the guarantee loan exposures, for the three government housing agencies -- Fannie, Freddie and FHA, will decrease $3.9 billion.
However, MSB investors, which include the Treasury, Federal Reserves and the Government-sponsored enterprises, will earn $3.9 less in interest income. Total losses on this side of the equation will approach $4.5 billion. The CBO reports the federal government will sustain about $600 million in losses.
Mass refinancing can also lawsuits filed against mortgage lenders. "For the originator of the existing loan, a refinancing represents the loss of both a borrower relationship and a servicing obligation," according to the CBO report. The CBO study also states, "It also relieves the originator of any obligation it may have had with respect to representations and warranties on the existing loan."
Indecision in the MBS Market
Many investors find themselves in a quandary about the direction of the market. Market players noticed the ambiguity several weeks ago. The president's address, which was short on details, did nothing to curb the uncertainty.
Barclays Capital credit analyst Sandipan Deb states the mortgage-backed securities affected by any refinancing plan affect drop in price last week. Deb describes the market as “sort of in limbo.”
The executive director of the American Securitization Forum, Tom Deutsch agrees the lack of details makes it difficult to ascertain the final cost to investors. Deutsch's organization represents mortgage underwriters and MBS investors.
Who Are The Winners?
The founding partner of Westwood Capital, Daniel Alpert, thinks taxpayers and mortgage lenders will gain the most from the refinancing proposal because homeowners will stay in their homes.
Alpert also says there is a solid and compelling case for supporting a refinancing plan that enables homeowners to remain in their homes put -- a foreclosed home has a final value that is 66 percent lower than the outstanding loan.