I’d heard about a week ago that the Administration was readying the Mother of All Homeowner Rescues, to be administered via Fannie and Freddie. Given that Team Obama has never done shock and awe on the financial front, and the Bush Administration engaged in it only on behalf of banks, I was plenty skeptical.
The program revealed on Monday is true to form: greatly underpowered and more likely to benefit banks than homeowners.
The simple outline is: the government is extending and modifying its disappointing HAMP program, which allowed borrowers underwater up to 125% loan to value to refinance through Fannie and Freddie at lower rates. HARP was expected to help 3 to 4 million borrowers but only 900,000 participated. The LTV cap is now being eliminated and no appraisal will be required. Only borrowers who have never missed a payment will be eligible. Certain fees will be waived for borrowers to refi into short-term mortgages.
Even the Administration conceded this wasn’t much of a program. From The Hill:
Edward DeMarco, FHFA’s acting director, was quick to note that the changes won’t expand eligibility to all the nation’s homeowners, but focus instead on enticing participation from those already eligible for HARP.
“This is not a mass refinance program,” he said. “It was really designed to enhance the program’s access for those borrowers who have always been the eligible population.”
Democrats jumped on the plan as being inadequate, and as some have read it, it won’t even provide much if any payment relief. Again from The Hill:
[Representative Dennis] Cardoza was quick to praise certain elements of the FHFA’s new strategy, particularly the elimination of new property appraisals in cases where Freddie or Fannie have a “reliable” automated valuation model.
Still, the Blue Dog Democrat is also leery that the devil is in the details. He criticized the FHFA reforms for “doing nothing to get the banks to cooperate.”
Encouraging homeowners to refinance into shorter-term mortgages, for instance, will do nothing to lower their monthly bills even at lower interest rates, he noted. Cardoza is pushing legislation to help homeowners refinance while lengthening their payback period up to 40 years.
“The problem is they can’t pay, not that they want to pay it off quicker,” he said. “They should have more time to weather this crisis.”
This plan will at best provide only modest help to homeowners. And in some cases, it will worsen their position. In some states, a purchase money mortgage is non-recourse. In all state, my understanding is a refi is recourse with only narrow exceptions.
It will have virtually no impact on the housing market because it will keep loan balances at the same inflated levels. Similarly, it will not contribute in any way to new construction.
So why is the Administration bothering to do this?
First, Obama is addicted to the appearance of Doing Something, regardless of whether it is productive. A clear sign is the apparent failure to investigate why HARP was a dud. As a management consultant, I’ve often been brought in to help clients dig their way out of failed initiatives. Almost without exception, their idea of what went wrong misses critical issues from the customer perspective. Cardoza suggests the banks dragged their feet. Another possibility is borrowers who are seriously underwater don’t want a refi; they might want a short sale or a principal mod. Remember, default is highly correlated with how deeply a home is underwater. And that makes sense: why should any one struggle to stay in a home if it’s a losing investment? Some parents may stay so as not to disrupt their children, or because they find the stress, legal hassle, and credit rating damage of a default to be too daunting. So even if a refi makes economic sense, borrowers may feel it commits them more to a home that they need to exit.
Second, this is a sop to the banks, because a refi ends any liability associated with the origination of the mortgage, including putback liability. Now that would seem to be a big “get out of jail free” card for banks engaged in putback litigation. But the reason this is not as nefarious as it might seem is that current mortgages aren’t the big bone of contention in putbacks (even if the originator lied, the borrower is paying, so there are no damages). But it would also end any chain of title issue on that mortgage. I’ve had lawyers calling me about the “empty trust” question, that mortgages might never have been conveyed properly to securitization trusts. Kemp v. Countrywide, in which a senior Bank of America servicing officer said Countrywide retained the notes (the borrower IOU) as standard practice raises the possibility that many of its securitizations were in fact empty trusts. The more mortgages that it can get refinanced, the lower its liability would be.
This plan is yet more proof that this Administration is not about to inconvenience banks to help homeowners and communities. It has tools in its power than would change the incentives for banks and make them far more willing to do what the overwhelming majority of mortgage investors would prefer, which is provide deep principal mods for viable borrowers. Forcing banks to write down seconds, and taking an aggressive stance on foreclosure fraud would restructuring debt more attractive than it is now. But just as the banks and their captured governments in Europe seem intent on grinding down entire economies to extract their pound of flesh, so are banks in the US continuing to operate a doomsday machine that grind up housing with no regard for the economic and social costs.