I said in my initial story on the new refi plan for Fannie and Freddie-backed homes that it’s not a housing plan, but a stimulus plan. Really important to keep that in mind. The housing market is depressed because of $700 billion in negative equity. This plan wouldn’t touch dollar 1 of that. It’ll put some more money in people’s pockets if they meet certain guidelines.
You know this, because Dan Pfeiffer on a conference call just said that “this is not a substitute for the American Jobs Act, but it is an effort to show that we are doing do everything we can.” They even have a catchy slogan for it: “We Can’t Wait,” designed to show that, despite a gridlocked Congress, the Administration is taking action. So anyone who tells you this is a fix for the housing market should be pointed back to all of this. It’s just a stimulus, one that is targeted to underwater borrowers, and I can think of worse targets.
Enough of the brush has been cleared out, the barriers to refinancing, that it will be more in all the stakeholders’ interests to actually do it. On a conference call just now, HUD Secretary Shaun Donovan explained some of those steps:
1) The refinancing plan is now eligible to any borrower with a GSE-backed loan (well over half of the market) independent of how deeply underwater they are.
2) The cost of refinancing has been reduced. Fannie and Freddie will: a) eliminate risk-based fees, b) reducing key elements of closing costs, c) reducing the number of homeowners who are required to get appraisal, d) reducing title insurance and lien processing. Also, the Treasury Department will work with states eligible for the Hardest Hit Fund to see if they can use their funds to lower closing costs further.
3) Reps and warranties on existing loans. Let me come back to this one.
4) Mortgage insurers will transfer their coverage from old loan to new loan automatically. This also deals with reps and warranties. Again, I’ll come back to it.
5) Major lenders agreed to automatically resubordinate their second lien behind the new loan. That’s actually a pretty big deal, and was a major holdup on getting these refis done.
Gene Sperling, also on the White House call, deftly sidestepped a key issue: if this was such a needed fix on housing, FHFA’s Ed DeMarco wasn’t fired for refusing to agree to it years ago. He just didn’t answer the question. DeMarco eventually came around, but a long time – and a lot of stimulus – was lost in the exchange.
So, earlier, I said “what’s not to like.” Here’s what’s not to like. The “reps and warranties” part of this. When you refinance a loan, you’re essentially creating a new mortgage, unlike a loan modification, where you modify the old mortgage. Under the plan, the FHFA will eliminate their ability to force repurchases on these old loans, and they would lower their ability to force repurchases on the new loans created. There will be a “modest fee” associated with relieving these reps and warranties, according to Donovan, which won’t be set until November 15. They will be lower than the current risk-based fees that Fannie and Freddie charge.
What does this mean? A “reps and warranties” case is a case where the loan was originated improperly. When Fannie and Freddie get sold a bad loan like this, they have the right to force it back on the originator. New lenders are reluctant to refinance such loans, because they become liable for the put-back.
What this means is that FHFA will essentially settle on all the loans that get refinanced for a “modest fee,” which we can safely assume will be next to nothing. And we know that a substantial amount of loans, perhaps a majority, were illegally originated during the bubble years. You’re letting the lenders who originated the loans off the hook for that, in exchange for allowing more refis.
Banks will flock to this, because it essentially substitutes bad paper for good. Gene Sperling specifically cited this reps and warranties issue as the major barrier for refis. “We feel that removing the reps and warranties barrier has the potential to unleash competition for housing finance for loans backed by the GSEs,” Sperling said. “Those who are not the original mortgage holder will sit on the sidelines as long as the potential exists for a mortgage that was not originated perfectly to be put back on them.” What he means is that the legal liability for taking on these loans will be removed.
There’s more to this. FHFA is currently in the middle of suing 17 banks over, among other things, reps and warranties. This initiative damages that lawsuit, as I said back in September, because it takes away some of the source material for it. The lawsuit would involve fewer loans, then, and it may tip the balance and hurt FHFA’s ability to proceed with the suit at all.
I’m trying to get a few more answers on this, but the danger is obvious. Banks broke the law and this program helps them get away with it. The fact that Donovan mentioned in passing that this kind of program could be extended to bank-owned loans through the state AG settlement just shows you where this is all headed.
A mass refi plan like this may be worthwhile as stimulus, but as far as the rule of law is concerned it pretty much stinks.