On Monday, the financial services industry association (aka lobbying group) SIFMA said that it would exclude mortgages in localities that had condemned mortgages from the to-be-announced market, which is an important source of liquidity for new Fannie and Freddie loans. The promoters of the program, Mortgage Resolution Partners, issued a wounded-sounding response.
So what does this all mean? The short answer is that on the surface, this looks like a clever bit of banker thuggery. Despite MRP’s complaints, SIFMA has excluded other types of mortgages from TBA pools for similar-enough sounding reasons that it looks to be within its rights to do so here. But while this change is an effort at intimidation, its economic impact is trivial, although local homeowner/voters fooled into thinking otherwise. Ironically, Mortgage Resolution Partners is playing right into the SIFMA scare tactic via its close to hysterical response.
This is an interesting case of geekery meets gamesmanship. As much as I’d rather see the condemnation scheme move to the legal foodfight stage, the bankers have made it clear they are pulling out all stops to halt this plan before it gets that far.
We provided some initial remarks on this proposal here. Last Friday, the newly formed Joint Powers Authority, the entity established in California to act on behalf of San Bernardino and two other municipalities, had its first meeting. The locals are upset that officials met months ago with representatives of MRP without disclosing that to voters. And even though county chief executive Greg Devereaux claimed the JPA will issue a “wide open request” for proposals, I have been told by an individual who obtained the information from the principals that the request for proposal will be crafted to favor MRP. So the local realtors aren’t wrong to be wondering whether there were “backroom deals”.
So San Bernardino, if it is to be believed, is engaging in a classic “fire, aim, ready” approach. It is moving ahead to Do Something without having yet made any decision as to its strategy.
In the opposition camp, the Wall Street Journal reported earlier this week that the White House was “skeptical” of the mortgage condemnation plan, and that Geithner had given it a thumbs down in a letter to Congressman Brad Miller two years ago. But having the White House signal antipathy for the plan is more significant than Treasury’s opposition. If nothing else, it says loud and clear that no one in the Democratic party will take umbrage if the state apparatus in California decides to pressure Inland Valley officials to drop the plan. And of course, the lawyers have saddled up, with Jones Day issuing a paper challenging the constitutionality of the plan (as much as I would not be surprised to see bankers sue on constitutional grounds, far and away the best legal argument against this scheme is that the promoters must buy the mortgages at well under fair market value for the economics to work).
So how does this TBA move fit into the bankster efforts to derail this scheme? The SIFMA announcement provides a decent high level description:
In the TBA markets, buyers and sellers trade in a forward manner – that is, a trade executed on a given day may not settle for one, two, or even three months. Importantly, at the time of the trade, the identity of the mortgage-backed securities that will be delivered is not known. Rather, the counterparties agree on certain general characteristics of the pool, such as the issuer, coupon, term (15 or 30 years), and settlement month of the trade. This means that the collateral that falls into the various categories must be considered fungible. Investors must have confidence that, as a general matter, one MBS is interchangeable with another. Performance should be comparable, and risk factors should be similar.
The TBA market is for agency loans, meaning those subject to a a Fannie/Freddie guarantee, or a Federal guarantee, such as FHA loans. By providing for liquidity, it allows for banks to issue rate guarantees to borrowers and also lead to slightly lower costs.
The practical effect of this proposed exclusion (remember, nothing happens unless mortgages are actually condemned) is that new Fannie and Freddie loans outside the condemnation scheme would be slightly more expensive, between 10 and 30 basis points, with the 10 end of the range far more typical. Even so, this move could be used to fan concerns among local voters: this wasn’t something the officials anticipated, so what other unknown unknowns might be visited on any counties that move forward? And even if the effect is small, why should local borrowers suffer?
Now of course, the astute reader is probably thinking, boy this change sounds like trumped up charges. But remember, the big risk that investors in agency paper are subjected to is interest rate risk, since the GSE insurance eliminates credit risk. Investors are still exposed to prepayment risk. And condemnation is a form of prepayment risk.
As a result, SIFMA stresses that homogeneity is important in the TBA market:
In the TBA markets, buyers and sellers trade in a forward manner – that is, a trade executed on a given day may not settle for one, two, or even three months. Importantly, at the time of the trade, the identity of the mortgage-backed securities that will be delivered is not known. Rather, the counterparties agree on certain general characteristics of the pool, such as the issuer, coupon, term (15 or 30 years), and settlement month of the trade. This means that the collateral that falls into the various categories must be considered fungible. Investors must have confidence that, as a general matter, one MBS is interchangeable with another. Performance should be comparable, and risk factors should be similar.
A New York Fed paper on the TBA market elaborates:
Similar to other forward contracts, in a TBA trade, the two parties agree on a price for delivering a given volume of agency MBS at a specified future date. The characteristic feature of a TBA trade is that the actual identity of the securities to be delivered at settlement is not specified on the trade date. Instead, participants agree on only six general parameters of the securities to be delivered: issuer, maturity, coupon, price, par amount, and settlement date..
The treatment of TBA pools as fungible is sustainable in part because a significant degree of actual homogeneity is present amongst the securities deliverable into any particular TBA contract. The most obvious source of commonality is the GSEs’ guarantee of the cash flows of mortgage principal and interest, which essentially eliminates credit risk. However, the GSEs’ standardization of underwriting and securitization practices also contributes meaningfully to homogeneity as well. At the loan level, the standardization of lending criteria for loans eligible for agency MBS constrains the variation among the borrowers and properties underlying the MBS. At the security level, homogenizing factors include the geographic diversification incorporated into the pooling process, the limited number of issuers, and the simple structure of “pass-through” security features.
SIFMA has excluded certain types of loans from the TBA market in the past because it deemed the prepayment risk to be too high, which is an exact parallel to its argument regarding communities that start to undertake condemnations.
In early 2008, the loan limits on “conforming” (Fannie and Freddie eligible) were increased from $417,000 to as much as $729,750 in certain high cost areas. SIFMA establishes TBA trading rules. It excluded so-called high balanced loans (between $417,000 and &729,750) from TBA pools. Why? Because borrowers with high loan balances are more likely to prepay when interest rates fall. . Do the math. If the costs associated with a refi are $3,000, the benefit is far greater for a borrower with a $650,000 mortgage than one with a $350,000. And empirically, borrowers with high loan balances are much quicker trigger with refis than those with smaller loan balances.
Given that news that SIFMA was considering this change leaked a week ago, the MPR response is lame. For instance:
No one has ever asserted that any municipality has the authority to condemn mortgage loans in a Fannie Mae, Freddie Mac, or Ginnie Mae pool. Further, if municipalities do have that power, then SIFMA must exclude loans from across the country, because the states have given city and county governments across the nation broad powers to condemn intangible assets including mortgage loans.
This is simply untrue. In 209 and 2010, a number of legislators and economists advocated the creation of an effort modeled on the Great Depression’s Home Owners’ Loan Corporation to buy and when needed, condemn distressed mortgages. And the proponents did not limit “distressed mortgages” to private label mortgages. And if MRP is trying to speak for San Bernardino, it has no business doing so. The JPA indicated it has no deal with MRP. Moreover, the JPA’s charter does not limit its potential activities to non-government guaranteed mortgages, so there is nothing official to preclude it taking that path in the future. And why wouldn’t it? Once it had cleared the operational and legal hurdles, how could it justify giving relief to borrowers who happened to have gotten a private label mortgage, and not borrowers in Fannie and Freddie mortgages?
The MPR note also reflects the author’s disingenuousness or their lack of familiarity with the TBA market. They attempt to argue that what SIFMA proposes is tantamount to redlining. That might sound like a credible charge until you look at the history and see that SIFMA does have a history of excluding large swathes of mortgages where they could make a case that they had more prepayment risk. But there’s nothing like the squeal of a little piggie being pulled away from his feeding trough.
I want to be clear: I’m no fan of SIFMA or banks. But in this beauty contest between Cinderella’s ugly sisters, MRP is not coming out the winner.
If the MRP people had the foggiest understanding of the mortgage market, or bothered to talk to anyone in it, they’d know that the SIFMA sabre-rattling is silly because 10 basis points is rounding error to borrowers. The fact that they’ve fallen for this close to empty threat shows what rubes they are. That alone should give San Bernardino officials considerable pause about getting into bed with them.
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I read this and shake my head wondering why anyone cares one way or the other. You have vultures and nothing else on every side of this market. They are trading around the GSE guarantee hoping for returns on the backs of homeowners whose equity vanished years ago and would improve their lot by handing over the keys. When are we going to interrupt this cycle of usury and speculation? The only answer is a bailout of the general population. Without it the housing market will remain dead in the water. And when are we going to stop savaging the capital of retirees? All the gangsters of both parties are apparently united in continuing this strategy. If they are hoping for a ten year depression all this makes perfect sense.
Yves
I think you’re wrong to say SIMFA’s within its rights to exclude the loans, because there’s a difference between excluding loans based on loan balance because the loan balance means prepayment risk and excluding loans made in the future because policy makers are looking at taking very underwater loans that were made in the past.
That is, the first situation involves a known and a reasonably quantifiable risk. The second situation involves no risk at all.
The only reason condemning loans is on the table is because these existing loans are a huge problem; municipalities don’t want mortgages per se, ever. If they did, this issue would’ve arisen a long time ago.
From the housing market perspective, even the loans MRP wants hurt the market because those people can’t trade up or down, excluding a big chunk of demand. A better designed program would go after more of the problem, but again might involve mortgages, precisely because of deficiency judgment risk (seconds are generally recourse, even in non-recourse states), or because when dealing with defaulted loans (not MRP style) the economics could be very attractive.
From a different public policy perspective, taking these loans is also crucial: these people are wasting money paying the loans that could fund their retirement, kid’s college, health care, base standard of living. We’re starting to see the problem via that AARP report that came out–lots of over 50 people are already evicted or in default, but many are among the still performing underwater folk. These people in most situations are near the end of their working lives, voluntarily or involuntarily because of disability or employer disinterest in the current market. They have no capacity to rebuild a retirement investment, and most people treat their house as just a big pile of cash to trade in for retirement security. Not only do these people not have that pile of cash, they’re worsening their economic insecurity every month they pay their mortgage. At some point in the next decade or so, taxpayers will face a massive bill because eventually enough grandmas will be poor enough people will decide action is necessary. That bill would be much less if these underwater, current and defaulted, loans were wiped out now.
Both of those reasons are the only reasons taking mortgages is on the table. The idea that an F/F mortgage issued tomorrow at current fair market value is a likely candidate to be condemned by a municipality focused on ending the housing/foreclosure/retirement crisis is absolute nonsense. SIMFA recognizes the what of the power but not the why.
Their tactic is a scare tactic designed to prevent litigating the constitutionality of the program, and it’s not justifiable on the grounds of ‘pre-payment risk’ unless, as MRP notes, every place with eminent domain–the nation–is treated that way. Because as regards future F/F loans, they are all equally likely to take those, which is to say not at all.
Note, I’m not defending MRP’s approach to eminent domain; they want to make a quick, fat buck while addressing only a small part of the problem. But eminent domain is a crucial power that needs to be on the table, whether for mortgages or the underlying homes, and I’d like to see MRP pay to litigate the issue. So I hope MRP/San Bernadino go forward at least far enough for that to happen, and I hope that people see SIMFA’s bullying BS for what it is.
Abigail,
You are missing the point of the SIFMA argument.
1. They are threatening to do this ONLY when a local entity starts condemning mortgages, not thinks about doing it or even takes steps in that direction. Given that is proving to be a process that takes a lot of local effort and the officials also open up the process to voter input, there is a big difference between a locality having the ability to do it and actually doing it.
2. The standard is prepayment risk. A condemnation is clearly a prepayment
3. MPR’s claim that this policy will be limited to private label mortgages strains credulity. This is where they plan to start, but how can you justify to local voters helping one type of borrower when another in exactly the same economic situation, ex that he has a Fannie/Freddie mortgage, won’t get help? This is politically untenable. Fannie and Freddie are private companies, and guarantors, not investors. It’s pretty hard to see the distinction here.
4. As indicated in previous discussions, you’d be very hard pressed to find precedent for lenders giving principal breaks for current borrowers simply because the borrower was inconvenienced by the loan. These typically happen only in private discussions with the borrower providing SPECIFIC evidence, that he’s in financial trouble and really might declare bankruptcy.
MRP made all sorts of charges made on redlining concepts. To be charitable, their argument is strained.
1. I understand the threat. Their argument is: If you take existing current underwater loans, then you pose a risk of taking future loans, underwater or not, and that taking is a new prepayment risk.
I’m saying that’s baloney. San Bernadino and anywhere else that actually takes an underwater mortgage is doing it for specific public policy reasons that are unique in time and do not apply to newly issued, post-bubble market value mortgages. Sure, if S.B. were taking mortgages just because they thought mortgages were a good asset to take, then newly issued F/F loans might face a prepayment risk that justifies the TBA action. Of course, it would help SIMFA’s case if existing current underwater F/F loans were targets of the proposed effort, which apparently they’re not, but even if they were it still doesn’t mean any newly issued loan would be at risk.
2) sure; of course it’s prepayment risk. It’s not that I misunderstand the claimed risk, it’s that I don’t think acting to condemn the deeply underwater mortgages that exist remotely implies that future mortgages would be the target of condemnation efforts. Why would they be? What would the public policy goal be? How could the eminent domain use be justified?
3) sure, I think it’s true that if the MRP or similar approach succeeded with private label mortgages there would be pressure to go after all similarly situated underwater mortgages, which would include F/F loans. Beyond the pre-emption problem posed by the law that created FHFA, however, is still my basic point: the fact that loans issued at bubble prices are being taken to address the housing and foreclosure crisis has no bearing on the risk that newly issued F/F loans made at post-bubble market values would be taken. Taking such loans makes no economic sense and cannot be justified as addressing the housing crisis.
4. This point of yours misunderstands me.
You can persuade me that SIMFA is “within its rights” to exclude San Bernadino or anyone one else from the TBA market for taking bubble era current underwater loans–let’s assume F/F loans are among them– as soon as you explain why taking such loans means San Bernadino is likely to condemn newly-made, post-bubble priced F/F loans (or anyone else’s new loans, for that matter.)
Abigail,
You apparently did not deign to read the Fed paper I linked to.
SIFMA is within its rights. It sets the rules for the TBA market. You may not like it, but that’s how it is. This is no different than ISDA setting protocols in the derivatives market and saying what is and isn’t an event of default in the Eurozone crisis (and there it took stances that were pretty questionable too).
You also contradict yourself in points 2 and 3. You concede that condemning deeply underwater mortgages is tantamount to prepayment risk. In case you somehow missed it, there are many GSE mortgages that are current in this region that are also deeply under water. And as much as we’d like to think that the housing market is near a bottom, there is no assurance of that. If the Eurozone comes apart in a bad way (not low odds) I can see a second global financial crisis, and everyone who is serious thinks a full bore crisis would be even worse than the 2008 one (we are out of policy bullets). What happens to real estate then? Residential real estate in Japan fell by 80% from its peak values.
And there is nothing in the document establishing the JPA that restricts the condemnations to private label mortgages. MPR does not have a deal with San Bernardino, there isn’t even a written term sheet, and MPR’s role in this scheme, even if it were to be approved, is as an advisor. It isn’t hard to imagine that locals in GSE mortgages will demand similar treatment if this program gets off the ground.
I suggest you not make combative comments on my site, particularly when you have not done your homework. You are in fact playing precisely into the syndrome I mentioned in the post, and you chose to ignore: that this SIFMA threat is a huge nothingburger. 10 bps is tantamount to zero as far as borrowers are concerned. But acting like it is a meaningful threat plays right into SIFMA’s hands. Your agitated comments are great PR for them.
It is a huge nothing. But it’s also an unjustified piece of threatening — the fact that the SIFMA is threatening with a paper sword doesn’t excuse the threats.
Abigail Field’s point is that the writedowns of current mortgages have zero effect on the prepayment risk of FUTURE mortgages, so the threat to increase the interest rate on FUTURE mortgages is just a generic threat, not one with any relation to economic reality.
the mortgage market is so complicated it is completely inflexible
Vultures indeed.
And regular people are being encouraged to get in on the game.
A number of neoliberal professional friends have or want to get into the landlord business.
What is authority for the 10 to 30 bp mortgage rate differential you cite above?
Also I still think that situs of the property to be condemned is where the mortgage and note are located, not where the house is.
1. The NY Fed study I cited, see the charts at the end.
2. I’ve spoken to lawyers. The fact that the mortgage was recorded locally, the borrower is there (the program is limited to owner/occupied houses) and the collateral is there means this does fall in the state/locality where the house sits, regardless of where the note happens to be now. I’m told this is pretty cut and dried.
As they say, middlemen will be middlemen. Seriously, how many fee stripping entities can they stuff between borrower (you and me) and lender (FED printing press)?
I’m much more interested in the alternate proposal to use eminent domain on foreclosed “shadow inventory.” The case can much more easily be made that having these homes rotting away for years is a detriment to the community. Banks and servicers would be the big losers, and it could spark them to deal more fairly with underwater homeowners on the one end, and potential buyers on the other. It would also speed the end to this grueling crisis rather than gum up the works further with endless litigation and machinations on all sides.
Here’s en even better solution: Since no clear titles exist, but only unsecured mortgage agreements, it would be good if they made those “mortgage” pools into time share pools, for investors to “rent” when they want some cash flow or maybe an arcane write off. Kinda like REITS but purely a rent concept. This solves the title problem, no one will have to deal with titles anymore. They can set up an exchange to buy and sell pools of time shares at such a high frequency that ownership, if it were ever claimed, would be so diluted that it would not pose risk. Ownership can be made to disappear altogether. And this new exchange will benefit traders who are losing their grip on other markets.
Interestingly, PHA’s have the right of first refusal on FHA foreclosures. Once they find a way to make it work its defacto public sector take over of foreclosures. It may not be an entirely bad thing if PHA’s take up some foreclosures–devil is in the details of course. Would it be an honest use of homes for poor people or a conduit for JV’s with banks?
I agree completely that there are MUCH better uses for this concept. That’s why I’m beating up on these clowns so much. They are really poisoning the well for a useful approach.
L, this begins to look like a “post Katrina/Flood” disaster scenario to get rid of people but salvage the real estate for possession by others: 1% Lebensraum according to The Shock Doctrine so beloved by Milton Friedman & Co.
Surely, the 1% Lebensraum looting model is “New Orleans after Katrina/The Flood.” We see how that’s working out in 2012.
Leaving aside the details…. just another case of multiple rapists fighting over a prostrate, immobilized and gagged victim (the American homeowner).
I’d suggest the use of eminent domain to forcibly purchase the homes of all Bankster Board Members at far below market prices and conversion of the appropriated properties into public parks… and camping grounds for the homeless left behind by their policies.
P.S. Please reserve me a spot with a nice view. I’ll bring my own tent.
“Banker thuggery”. Exactly. That’s been the story for decades now, and they still haven’t learned anything:
http://strikelawyer.wordpress.com/2011/02/24/bankster-jubilee-v-popular-jubilee/
Hight LTV HAMP LOANS are also excluded. It might be that they want to make sure the pools are uniform. I agree with your reasoning for the exclusion. It’s not political.
I beg to differ. I think the driver is that the industry wants to kill the idea, but they do have a legitimate case for this action.
well in either case, it is correct to refer to sifma as a trade group. the representation is very lop-sided.
Yves,,
Do you think the fact that pubic housing authorities have right of first refusal on FHA foreclosures be a.) something PHAs use to bolster balance sheets and b.) since PHA’s do not have capital do you think preferred and HUD approved investors will JV with PHA’s to buy em up and make em up?
Test.
Eminent Domain is a legal nightmare, there is another way.
The primary home market is not just a problem, it is one of the primary problems with our economy! Lack of aggregate demand and confidence is what needs to improve to reduce unemployment. Lack of demand is why businesses are not hiring more workers and spending the trillions of dollars they have in banks.
The Federal Housing Financial Agency (FHFA) is wasting an opportunity to fully utilize the historically low interest rates the Federal Reserve and investors are creating in our financial markets. By not providing the primary home market with the best mortgage terms to homeowners, for the current economic conditions, FHFA has depressed economic activity, and prolonged the Great Recession. By not responding to the mortgage crisis of 2008 with new and better mortgage terms to help keep families in their homes, and maintain home values, our citizens have experience enormous hardship, unnecessary foreclosures, unemployment, abuse and fraud by mortgage servicers, an increase in government debt liabilities, and a loss of over 40% of their wealth in the last four years.
FHFA was created to oversee the federal home loan banks and other federal housing finance organizations. It also acts as conservator of Fannie Mae and Freddie Mac. The conservator’s duty is to protect F&F business’ value. The Plan I am presenting is a different way of improving the financial health of F&F and the primary home market and allow people to remain in their home when possible.
The Federal National Mortgage Association better know as Fannie Mae was sponsored by the government (American citizens) in 1938 to provide a secondary market for mortgages. They did a suburb job for many years until they were privatized and got involved with purchasing subprime mortgages and bad management. These problems have been corrected. Management has been changed and underwriting standards have improved.
The 30 year fixed interest rate mortgage was created during the Great Depression of the 1930s by the Home Owner’s Loan Corporation. The HOLC exchanged government bonds for discounted home mortgages held by banks. The HOLC restructured the mortgages, lowered the interest rate and the unpaid principal amount to make it possible for homeowners to remain in their home. It was a very successful government sponsored program. HOLC even returned a profit to the US Treasury. I believe we can improve on this proven way of helping millions of homeowners stay in their homes and improve our economy, without it costing taxpayers a dime, by creating a mortgage with terms that fit our current economic conditions. We do not need to create another government program. We can use the housing finance programs we already have.
For years the Federal Reserve has been using monetary policies to maintain low interest rates to help revive the economy. The problem is that mortgage originators have not been able to offer the public the best mortgage terms, to help economic recovery, because of a lack of a secondary market for the new mortgage.
I am sure the Fed would agree that an infusion of confidence and purchasing power into the middle class will go a long way in obtaining their goal of lowering the unemployment rate and price stability. We have all the necessary institutions in place to help them make it happen, if we fully utilize them.
The strength of any modern consumption economy is its middle income population. If they are financially strong, the economy will be strong and the government will have the revenues to pay its debt and current expenditures. 70% of the economic activity in our economic relies on the consumer. It is consumer demand that drives increases in employment and investment.
The other world economies that want to achieve growth, Spain and Greece to name two, should take a look at the “Plan” and adapt it to their economies.
Different Mortgage Terms Are Needed To Solve The Foreclosure and Unemployment Crisis; To Increase Home Ownership For Qualified Primary Home Buyers
What mortgage terms should be offered to the public, to improve the primary home market, reduce foreclosures, and unemployment, with the 10 year US Treasury Note yielding about 2% and with the Fed rate at .25%, after a collapse of the primary housing market?
The private financial sector needs to adopt the following mortgage, with terms that are more appealing to investors than the 10 year US Treasury Note, to provide people with a mortgage with a lower starting mortgage interest rate and then a long-term fixed interest rate. As HOLC did in the 1930s a principal reduction plan must also be put in place for underwater mortgages to reduce strategic abandonment and to quicken the balancing of the primary home market and economic recovery.
A mortgage-backed security (MBS) needs to be created that the interest rate increases each year until the interest rate equals the thirty year fixed rate mortgage interest rate, or a little above it. A guaranteed annual increase in the interest rate is something a 10 year US Treasury Note doesn’t have. If the mortgages are securitized by Fannie Mae or Freddie Mac, the MBS would be guaranteed by the full faith and credit of the federal government, similar to a US Treasury note. Mortgages that are collateralized with less than 10% equity should be insured, if possible, with a mortgage payment insurance policy, rather than mortgage insurance, to guarantee payment of the payment each month if the homeowner is unable to make the payment.
History has shown that the Fed cannot continue maintaining mortgage interest rates at their current level, by using monetary policies, without debasing our currency, which will lead to another cycle of inflation, higher interest rates, a devaluation of current debt, and a return to a recession cycle to re-balance values in our economy.
Our economy had been slowly improving, but the government reported unemployment rate has increased to 8.2%. The total unemployment and under employment rate has been reported to much higher. Foreclosures are expected to increase this year, further depressing the primary home market, even as the Federal Reserve is pumping billions of dollars into the financial sector to help maintain low mortgage interest rates. Currently there is talk about the Fed creating QE3 to help our economy improve, because it is showing signs of slowing down again. The stimulus helped but was not directed at the main problem of the financial crisis, the primary home market. QE2 did not improve the Main St. economy very much, because the money did not make it into the Main St. economy through mass new refies and mortgages. The mortgage finance system that had been developed to handle a down turn in the primary home market was not utilized correctly. Millions of home mortgages still need to be refinanced and restructured to improve the primary home market and the economy. The underwater mortgage situation needs to be correctly resolved. QE3 is unnecessary. We we can have an economic recovery without debasing our currency. New mortgage terms will improve people’s disposable income, confidence, and the primary home market, which will reduce the unemployment rate and the deficit.
The Fed’s previous actions have improved the financial markets, but their efforts have not improved the primary home market to prevent more foreclosures and reduce the unemployment rate significantly.
To improve Main Street’s economy and reduce unemployment, people’s monthly disposable income and confidence needs to improve, to increase aggregate demand. By restructuring or refinancing almost all primary home mortgages, with the correct terms, purchasing power would be increased on Main St., which would speed-up economic recovery without increasing the money supply. Increasing the money supply, without increasing the supply of products and services, debases the currency, which leads to higher prices.
The Solution:
How the “Plan” increases people’s monthly disposable income and confidence, to increase aggregate demand, is by making available, to all qualified homeowners, and home buyers, a mortgage with new terms. Terms that they can succeed at, unlike the previous mortgages that created the collapse of our economy and the collapse of most of the world’s economies.
The risk of default of the new mortgage is near zero, because the borrower would qualify at the highest rate of interest the mortgage interest rate would rise to, which would be the 30 years fixed rate mortgage interest rate or a little above it. The 30 year fixed rate primary home mortgage rate is currently about 4%, or lower, for well qualified mortgage seekers.
We have been maintaining the minimum income of the unemployed. This is not a complete solution for posterity. By improving the confidence and monthly disposable income of the 91.8% of the population that is employed, this will put most of the 8.2%, that are unemployed back to work, because of the increase in aggregate demand, which will increase the need for more workers for businesses.
The new mortgage terms would be similar to other mortgages that are available to home owners and homebuyers. It starts out at a low-interest rate, but, and this is important, the Ascending Interest Rate Mortgage is not indexed after a few years. as the current 5/1 Adjustable Rate Mortgage is.
The Ascending Interest Rate Mortgage has a starting interest rate of around 3% or lower, based on the ten-year US Treasury Note. Currently the 10 year Treasury Note is about 2% or lower. That would make the interest rate for the first year lower than 2.75%. The interest rate would increase .25% per year, unlike a Treasury Note which has no increase in the interest rate during its term. The interest rate would stop increasing at 5%, which will take 9 years to obtain, or at the 30 year fixed rate mortgage interest rate or a little higher, whichever is lower or best for the economy when the mortgage is originated.
Long term interest rate increase risk is reduced by the The Zero Inflation Taxation Policy as discussed in other articles by the creator of the AIR Mortgage.
Remember, the person obtaining a new mortgage would qualify at the highest interest rate the mortgage will obtain to reduce the chance of a default.
As the economy improves the Ascending Interest Rate Mortgage will decrease people’s purchasing power with a .25% higher interest rate each year to help prevent too much aggregate demand from being created, which would help create another cycle of inflation, or a primary home price bubble.
The new mortgage terms would only be available to owners, or buyers of owner occupied homes. The home buyer, or the homeowner will embrace the new mortgage terms, because they will know what their housing cost will be for years to come. With predictability comes confidence in taking on the responsibly of a mortgage. They will also prefer the AIR Mortgage over the 30 year fixed rate mortgage because of the lower starting interest rate. A simple letter of modification stating the old terms and the new terms is all that is needed to modify those mortgages that have remained current and are held in Fannie and Freddie’s portfolio of mortgages. A small fee is all that is required to cover the cost of writing and sending the letter.
With the AIR Mortgage available, more homes will be sold and refinanced. With the AIR Mortgage available, economic activity in the primary home sector will increase, which will help the primary home market and the economy to improve. The foreclosure rate should decrease. The foreclosure inventory would be quickly sold to owner occupied home buyers. The primary home market will stabilize and then home values will slowly increase 1 to 2% a year if the “Plan” is fully implemented.
The Director of the FHFA, Mr. DeMarko, needs to be replaced if he fails to create a secondary market for the AIR Mortgage to quicken the restructuring of F&F’s mortgage portfolios. We should take Fannie and Freddie out of conservatorship, and use them to improve the economy and the primary housing market. We made a mistake when we allowed the government to privatize Fannie Mae. Fannie Mae and Freddie Mac should be foreclosed upon and used for the public benefit instead of for profit as they were originally created for. If the restructuring, underwater mortgage monthly principal reduction, and refinancing of the mortgages is done quickly, and the housing market and the unemployment rate begin to improve, we may be able to let the Bush Tax Cuts expire, without creating a recession, because of the increase in aggregate demand the new mortgage terms will create with the increase in disposable income on Main Street.
Investors will invest in the AIR Mortgage securities, because the security will increase in value as the annual interest rate increases .25% a year, unlike the treasury note and other fixed rate debt instruments which will decrease in value.
Banks and mortgage brokers do not hold all the mortgages they originate. They sell most of them to investors, or they are securitized into MBSs.
For the AIR Mortgage to become available, Fannie Mae and Freddie Mac, which are government sponsored private mortgage securitization corporations, are the largest securitization firms in the US. F&F will need to offer to purchase the mortgage from the banks and other mortgage originators, before the banks and mortgage brokers will offer the new mortgage terms to the public.
The private financial sector and Fannie and Freddie could prevent millions of unnecessary foreclosures, and save billion of dollars, by adopting the AIR Mortgage to restructure most of the mortgages they hold in their portfolios. The financial sector and F&F would win the support of millions of families if they succeeded in this endeavor. Our economy would be on a defined road to recovery. The deficit would decrease as employment improved.
The Plan also recommends an income tax reform policy that will stabilizes long-term interest rates, thus decreasing interest rate increase risk. The tax policy will help slow down the economy in the correct way, without adding cost, when the economy is expanding to rapidly. The change in the tax code will also decrease the wealth gap between the impoverished and the 1%, without unnecessary tax increases. It also presents a better procedure to dispose of the underwater mortgage situation, without costing the taxpayer a dime.
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Leonard C. Tekaat is an economic scholar, author, and retired small businessman with over forty years of experience in home finance and real estate investment. He is a former candidate for the California Congress. He is the Chairman of a special Committee For Economic Reform and A Better Economic Future.
Leonard C. Tekaat