If you had any doubt that the intent of policy, such as the heroic efforts by the Fed to channel money to the mortgage market my manipulating spreads of mortgage paper so as to lower borrowing costs, was not merely to clear inventory but boost prices, today’s action should put your mind at rest.
The powers that be have just put in a big time above market bid, now permitting refis of 125% LTV for borrowers who are current. That is, assuming they get any takers.
The effort is presumably to address borrowers who are already under water, and so would be swapping out of a mortgage that is in negative equity land for one that has a lower coupon. That lowers their payments (ex costs) and frees up some of the money formerly spent on the mortgage to spend on other stuff, like paying down their credit card debt (that was a lame attempt at humor, the authorities hope this will lead to more consumption). In addition, the new mortgage in theory is less prone to default than the old, since it consumes less of the borrowers’ income.
But theory may not map on to practice, First, in most states, a purchase money mortgage is non-recourse, but a refi is. So some borrowers will put themselves in worse shape it they take up this offer.
Second, defaults are more likely with negative equity loans, apart from payment stress. Why? Let’s face it, even if you make your payments, you still expect a big bill when you sell the house unless the market appreciates enough to enable you to sell it for your mortgage balance. The other exit is negotiating a short sale with the bank, but that still leaves the hapless seller with a large tax bill if prices fail to recover by the time the forgiveness window closes (2012?).
Lousy endgames leave buyers not highly motivated to work hard to make payments when adversity arises. They realize, correctly, that they are better off not throwing good money after bad.
But this program nevertheless suggest that the authorities sincerely believe that current price levels for housing are the result of panic, and not a return to historic relationships of housing prices to incomes and rental prices.
From CNBC (hat tip reader Marshall):
Homeowners refinancing their mortgages through loans backed by government agencies will be able to borrow up to 125 percent of their homes’ value under new regulations enacted Wednesday.
The rule changes, part of the government’s attempts to restore housing affordability and stem the foreclosure crisis, apply to loans backed up by Fannie Mae and Freddie Mac.
Yves here. Huh? This is beyond Orwell, it’s patently silly. “Housing affordability” has traditionally meant “let’s do things so people can afford to BUY houses.” It even once included stuff like Section 8 housing, giving tax breaks for rental housing targeted to lower income people. The intent is to prop up prices by keeping stressed borrowers from selling their houses and possibly also sending an information signal through the 125% figure, that housing really ought to be priced higher. That is anti affordability. And the concept of “affordability” to my knowledge has never before been extended to keeping homeowners in place. Back to the article:
Previously, homeowners could borrow up to 105 percent of their home’s value. The new loan-to-value ratio is set up at 125 percent in a further effort to address those mortgage holders who owe more than their homes are worth.
“By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly,” Treasury Secretary Timothy Geithner said in a statement….
The new LTV rate will be offered only to borrowers who are current on their mortgages that are owned by either Fannie or Freddie.
“This is a change that will put affordable refinancing opportunities within reach of performing borrowers who have suffered the effects of local home price erosion,” Freddie Mac Executive Vice President Don Bisenius said in a statement.
Home values in many markets have sunk by 18 percent in the last 12 months, according to Standard & Poor’s/Case Shiller home price index…..
In a separate move, the government is encouraging borrowers to take advantage of a chance to lower their mortgages from 30-year to 25-year in order to save on interest charges.
The government will reduce the processing fee for borrowers who take advantage of the 25-year option.
Update: Reader RueTheDay tells us that Housing Wire reports that only 6% of agency loans have LTVs between 105% and 125%. While this may seem small, Fannie and Freddie have such large books that even a small percent is a whole lotta mortgages. But the key unknown is the uptake rate, which could prove to be modest.