Feedback on Potential Housing Bailout Programs


Don’t you
always wonder how much the guys standing at the stoplights take home, tax-free?
It is a little farcical, but: HowMuchTaxFree?

A doctor examining a woman who had been
rushed to the Emergency Room took the husband aside and said, “I don’t
like the looks of your wife at all.” “Me neither doc,” said the
husband. “But she’s a great cook and really good with the kids.” Life
often involves dealing with misunderstandings and confusion, and the rumors
surrounding a mass refi plan certainly fit into that category. In general
markets trade off of future prospects and the prospects of a huge
government-sponsored refi plan is roiling the markets. (I even set out some
more in-depth thoughts at MassRefi.)
Any plan must help a broad group of homeowners, stimulate the economy, and cost

One trader mentioned that, “after HAMP
and HARP the U.S. is now ready to launch a new program called Helping
Underwater Mortgage Performance” and that the market “went toxic
after it heard that Obama was getting “REFI.GOV” vanity plates for
his new limo.” As one would expect, the prices of premium/older production
are suffering compared to current/rate-sheet production. Yesterday, for
example, Fannie 6’s (containing 6.25-6.625% 30-yr mortgages) were down .5
in price versus Fannie 4’s which improved nearly .250.

One proposal would allow millions of
homeowners with government-backed mortgages to refinance them at today’s lower
interest rates, which in turn would lower their mortgage bills and, in theory,
help the economy since they’ll take the money and spend it elsewhere.
Homeowners who have been unable to refinance their loans either because they
owe more than their houses are now worth or because of bad credit. Other
suggestions include a large-scale home rental program that would keep
foreclosures off the market. What is lacking, of course, are any concrete
details about any of this. Items such as how delinquent borrowers would be
treated versus on-time borrowers, who would administer the program, and how
would investors be made whole are immense issues.

In the meanwhile teams of researchers at all
the investment banks are sending out educated guesses as to the pros and cons
of various plans. (I bet this is what they really live for!) How are reps and
warrants for existing loans handled? What about non-government loan borrowers?
If borrowers who have their loans modified, or refinanced, stop making their
payments, can investors go back to originators under buy back provisions? When
did HARP become a verb? (“If you HARP these seasoned loans you are exposed
to new put-back risk. If these borrowers default in their current form, it is
very difficult for the agencies to put them back given servicers can argue the
loans have been paying for 3+ years and therefore were issued as clean loans.
However, once its HARPed that argument is no longer applicable and
they are exposed to new put-back risk.”) And with Republican control,
what are the odds of anything like this happening?

It seems that conjecture is focusing on basic
plans. One is to make a low mortgage rate available to all borrowers. Another
is a blanket settlement between originators and FHFA that settles all existing
and future reps and warranties liabilities, and the originators will just be
agents for the GSEs and will not be responsible for the credit performance of
HARP refied loans. Another option is an expansion of HARP which will remove the
origination date restriction for HARP eligible loans, thus allowing borrowers
to do HARP multiple times and will make recent production HARP eligible. And
the last seems to be implementing parts or all of the changes in Senator
Boxer’s bill.

An analyst wrote, “I’m not sure I
understand the economics/logic of a streamline refinance program. Assume for
the moment that borrowers with high LTV’s, i.e., LTV’s 100%, a result of
home price decline, could do a rate and term refinance from say 6% to 4.25%.
Assuming an average remaining term of 25 years, the monthly PI payment
would drop by 16%. So, in real economic terms, how worse off is FNMA or
Freddie? Before the rate/payment drop, the lender/investor has a loan on the
books that is underwater and at high risk of default. After the drop, while the
loan is underwater by the same amount, cash flow has dropped but the
probability of default has arguably declined. Now I know that studies show that
negative equity is the key driver of default, but I would argue that although
the borrower’s equity position has not change the borrower’s perception of the
situation has. Once a borrower is in a deep negative equity position, they
probably view their monthly payments (after tax) as rent, not as payments on an
investment. So, a drop in monthly payments is like a drop in rent which
improves their likelihood of continuing the lease. Does the reduced likelihood
of default compensate for the reduced cash flow? I haven’t analyzed this but I
bet it’s significant and for some borrowers actually increases the economic
value of the loan. And, the same argument would apply to loans in

Yesterday’s commentary discussed HUD’s note
about the implementation of UAD. I should clarify that this is from HUD (mostly
FHA), not Fannie Freddie. I received a few notes: “In the newsletter
you mention that UAD has been pushed back to Jan 1, 2012 per HUD mortgagee
letter 2011-30.  Although HUD has pushed the implementation to 1/1/12, to
the best of my knowledge FNMA and FHLMC are still implementing UAD as of Sept
1, 2011.” “The UAD implementation date for the GSE’s is still
September 1, 6 days from now.  Everyone managing this process, including
the aggregators, has been waiting on HUD’s policy concerning UAD.  The
word from HUD was that they were going to adopt UAD requirements, but didn’t
specify when.  The mortgagee letter addresses HUD’s acceptance of UAD and
their requirement for appraisals with a case number assignment date of January
1, 2012.  This doesn’t push back the GSE implementation date.”

Yesterday the commentary noted a memo from Flagstar regarding 4506-T
requirements. In turns out that Flagstar sent out another memo: “Effective
with underwriting submissions on or after September 1, 2011 the 4506-T
Execution Criteria have been updated for conventional loans to reflect that one
year of tax transcripts results are required, or the most recent two years
results if required per AUS findings. For Delegated underwriting customers,
these requirements are for all loans delivered on or after September 12, 2011.
Please note this excludes Freddie Mac Relief Refinance, Doc. #5354, which does
not require results.”

But while we’re on Flagstar, it announced that on August 18 the NYSE provided
notice to the Company that it did not satisfy one of the NYSE’s standards for
continued listing applicable to the Company’s common stock. More information on
the status, and how it can be repaired, can be found at: NYSEFlagstar.

The stock and bond markets had plenty to chew
on yesterday, between Steve Jobs leaving, Berkshire Hathaway’s purchase of $5
billion of BofA equity, and the conjecture on everyone with a government loan
suddenly ratcheting down their mortgage rates. (Would we be talking about this
if the employment picture was better? MBA’s chief economist Jay Brinkmann
stated in a press call on Monday that increasing employment was the most
important thing that the government could do to help the housing market.)
Thursday we were reminded that hedging “like for like” makes sense:
Fannie 3.5’s were better by about .375 in price, but Fannie 4’s (with
4.25-4.625% 30-yr mortgages) were only better by .125. The 10-yr ended the day
around 2.22%.

You’re An EXTREME Redneck When… (Part 1 was yesterday; part 2 today)

9. Your junior prom offered day care.

10. You think the last words of the Star-Spangled Banner are, “Gentlemen,
start your engines.”

11. You lit a match in the bathroom and your house exploded right off its

12. The Halloween pumpkin on your porch has more teeth than your spouse.

13. You have to go outside to get something from the fridge.

14. One of your kids was born on a pool table.

15. You need one more hole punched in your card to get a freebie at the House
of Tattoos.

16. You can’t get married to your sweetheart because there’s a law against it.

17. You think loading the dishwasher means getting your wife drunk.

If you’re interested, visit my twice-a-month blog at
the STRATMOR Group web site located at . The current blog takes a look at the
recent news sweeping the MBS investor market regarding a new mass refi plan by
the government. If you have both the time and inclination, make a comment
on what I have written, or on other comments so that folks can learn what’s
going on out there from the other readers.

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