According to the article, the Obama administration could announce a program modeled on one that was originally devised by Columbia University economists Glenn Hubbard and Christopher Mayer. Under that plan, all homeowners with a Fannie or Freddie-backed mortgage can refinance with a new mortgage at a fixed rate of 4.2% or less if they have been current on their payments for at least three months. And the clincher is that the plan imposes no other qualification - no appraisal or income verification.
The typical borrower would reduce his or her principal and interest payments by about $350 dollars, a total reduction in mortgage payments of nearly $100 billion per year, according to Hubbard. It is expected to help refinance $3.7 trillion in mortgages and would come at an immediate fixed cost of $121 billion to the government.
I can't begin to tell you what happens if that occurs.
Remember that everything is in fact a balance sheet. Someone owns all those mortgages -- Fannie and Freddie guarantee them but do not own most of them.
Who owns them?
Little old ladies. Literally.
Your pension fund -- both public and private pension funds.
You, maybe, through various bond funds and other similar instruments.
Note that pension funds typically assume about 8% in total returns a year. Most current coupons that would be refinanced are in the 6-7% range, so this would be a cut in income to those holders of roughly 1/3rd, making it even more-impossible for those pensions to ever pay as agreed (they're already in monstrous trouble, by the way.)
This plan, if Obama were to do it (and violate the Constitution again in making the appointment) will not increase GDP materially, nor will it actually improve the economy. It simply will take that $100 billion a year from MBS investors, most of whom are in fact pension funds and others who would and do immediately spend that money, and give it to homeowners.
In other words it will screw retired (and soon-to-be-retired) people and give their money (again) to those who foolishly overspent on houses they cannot afford under the current terms, just as have "zero interest rates" generally.
Do not be fooled. This will generate fee income for the banks of course but there will be little or no net economic benefit as a whole -- it will simply take funds from one person and give them to another. In fact, when you account for the fees, it is negative sum to everyone except the banks (who get the fees.)
Update 3:34 PM CT -- CNBC is reporting that the Administration has denied any intention to push such a plan.
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I'm wondering if this is really a back door policy to try to reestablish the original "wet ink" signatures and try to clear up/fix any holder-in-due-course issues with all the current mortgages? Not trying to roll off into tin-foil hat area, but I don't ever think that what they say they're doing is for the stated reason(s).
Beat me to the Peggy Joseph clip, Low! Well played.
"If I hep him, he gonna hep me!"
Doesn't get any more complicated than that. It's not amazing that Barry is trying to buy votes - it's simply amazing though how cheap those votes can be bought for.
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The preservation of liberty depends upon the intellectual and moral character of the people. As long as knowledge and virtue are diffused generally among the body of a nation it is impossible they should be enslaved. - John Adams
Actually this is a net drain on the non-FIRE economy, as the banks extract even more surplus from the real economy. Great!
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"Let China sleep, for when she wakes, she will shake the world." - Napoleon Bonaparte
"Circulation ceases first at the outer edges [Europe and Japan]. It will take a while yet for the decay to reach the heart [America]." - Foundation & Empire by Isaac Asimov
Aztrader
Posts: 6650
Incept: 2007-09-10
Scottsdale, AZ
Actually, mutual funds and insurance companies own a ****load of this paper too and will also be affected. The insurance companies are starving for yield right now and many will take it hard if they lose any of their higher yielding paper. It will force them to take even greater risk on what they buy in the future. But since most are most likely using Bernanke accounting, things won't change much from a balance sheet prospective.
Poor babies. All they are selling today on the investment side are derivative based toxic waste that they call investments. The good old annuities of yesteryear don't exist anymore. When this implodes, it will make 1929 look like a cakewalk. The true basis of their so called investments that back their contracts will be nothing but derivatives. Let's see how they pay their claims with empty promises................
Matt_bear
Posts: 6364
Incept: 2008-07-15
a week early on spy puts
the general public just doesn't truly understand the concept of zero-sum.
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In terms of real-world fundamentals, I expect that most of the people around me, whom I work with day to day, and whom I pass on the street ... will be dead within five years.
After not paying for 2 years - should easily have 3 months payment on hand. But I agree with Rad - it's a populist ploy with the real intention to re-ink new signatures on the mortgage. Well played Obama + banksters
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"You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else."
Hmmmmmmm.............very dumb indeed. If this goes through however, I will take advantage if they offer a 20 year or less term. I purchased 10 years ago, with 15% down payment, no second mortgages and no other refi's.
This plan blows, and is illogical. If they do it though, I will have to take advantage. I would be financially dumb NOT to. The ship is sinking. The quicker it goes, the survivors can pick up the pieces and rebuild. If I can help it on its way while gaining even a small advantage, I will.
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"In a land without Rule of Law even a sane man who desecrates the state must be made to look crazy. " Rubicon Jan. 9, 2011 blog post. "Those who make peaceful revolution impossible, make violent revolution inevitable."
You can do a map search of real estate listings there, including limiting the listings to only bank-owned homes and short sales. The map displayed blew my mind. Then I looked at a similar display in St. Petersburg, Clearwater, counties to the north of Tampa and to the east, and the volume of homes was astounding. And this is just one metro area.
Sometimes I forget just how enormous the problem is. It was a nice reminder.
This plan blows, and is illogical. If they do it though, I will have to take advantage. I would be financially dumb NOT to.
Agreed. I'm paying 6.125% right now and it fits within my budget. But if I can get it down to 4.2% without extending the term, I have to take advantage.
I wonder how many this will help? So many were in ARMs with rates lower than 4.2%. Can they afford an increase in monthly payment, even if it will get them into a 30 (more?) year fixed rate mortgage?
4.2% is a lot in a deflationary environment. Reduce the pensions in the underfunded plans and get the spiral started.
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Splashdown
Posts: 556
Incept: 2010-04-05
Central Illinois
When you refinance, you settle your original mortgage (screwing the seniors, as you put it)and enter into a new one, right? You pay-off the old obligation with the money from your new loan and enter into a new contract right? If so, when someone refinances, they enter into a new 30 year term. So if a person entered into a 30 year agreement 15 years ago, and then refinances with a new 30 year home loan, they will end up paying interest on the house for a total of 45 years.
No appraisal, no income verification - all backed by the US taxpayer. WOW!!
Like you said, it sounds like a bankers dream due to the fees they charge. As far as the teachers and cops pensions go, they'll just try and raise our taxes to cover the difference.
Ktrosper
Posts: 1500
Incept: 2010-04-06
ft collins co
Obseedian wrote..
$350/month? If you're upside-down on the mortgage that won't do squat.
It'll allow 'em to go out and buy more cheap chinese **** to stuff in their upside down homes ;)
That's a lot of flat screens, ipads, iphones, tablets, etc!
Everythings gonna be just fine.....
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The unexamined life is not worth living.-Socrates The only stable state is the one in which all men are equal before the law.-Aristotle Liberty exists now in the spaces government has not yet chosen to occupy.-Doc Zero I anticipate that 10 Dallas Cowboys Cheerleaders will blow me this evening.-K.D
Splashdown
Posts: 556
Incept: 2010-04-05
Central Illinois
Jbreed...I did what's knows as a loan modification. It didn't extend the terms, it just lowered the interest rate (4.5%). I think the fee was like $250 vs the what ever they charge for a full blown refinance - something like 2-3 grand?
This isn't as bad as you guys think it is. And I'm not saying that because it would benefit me. I'm gonna take it in the arse on this. Themortgagedude will not be allowed to participate. The big servicers will not roll this out to correspondents.
Not that I agree with any policy trying to encourage prepayment of coupons. I just think there are way bigger fish to fry. I'd just like to pry open the books of the Federal Reserve and I bet you'd find stuff a thousand times worse than this. I bet we are bailing out foreign banks holding Greek debt for instance, and around here we've known for 3 years Greece was BK.
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I'm already visualizing you with duct tape over your mouth.
MBS are also held by public pension funds like Calpers. Any short fall in return below 8% which is what they use as their expected return, is made up by special assessments to the cities and counties that use the fund. In other words, expect more pressure on city and county budgets resulting in either tax increases or service cutbacks.
