RUMOR: Rapid Refinance Loan Modification Plan to be Introduced in Congress

By: • Tue, Sep 28 2010, 12:07 PM

This news just flashed across my terminal:

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WASHINGTON, Sept 28 (Reuters) - As many as 30 million U.S. homeowners would be able to refinance their mortgage at record low interest rates regardless of their income, credit history or loan-to-value ratio under a plan to be unveiled on Tuesday by a Democratic lawmaker.

The legislation would allow for blanket 30-year, fixed-rate mortgages at the prevailing market rate, now around 4.3 percent, for anyone seeking to refinance a government-backed loan, Representative Dennis Cardoza told Reuters on Tuesday.

The plan would help a wide swath of borrowers and is much more comprehensive than the narrowly targeted efforts President Barack Obama has tried to date.

11:25 28Sep10 RTRS-U.S. HOUSE DEMOCRATIC LAWMAKER SAYS TO INTRODUCE MORTGAGE MODIFICATION EFFORT TODAY FOR FANNIE, FREDDIE, GINNIE MAE, FHA, VA LOANS
11:25 28Sep10 RTRS-REP. CARDOZA SAYS MORTGAGE PLAN WOULD ALLOW HOMEOWNERS TO REFINANCE AT FIXED RATE REGARDLESS OF INCOME, LOAN TO VALUE OR CREDIT HISTORY
11:25 28Sep10 RTRS-US House lawmaker plans blanket mtg modification bill

(Reporting by Corbett B. Daly; Editing by Neil Stempleman)

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Before you start celebrating, some background info is needed.

We heard rumors of a program like all summer. The MBS market reacts negatively each time the plan is mentioned but valuations always ends up shrugging off the news shortly thereafter. Below are a few comments that we've published on the topic:

Rapid Refinance Program: Don't Bet On It: Morgan Stanley put out a research piece suggesting a "change" to mortgage refinancing requirements: "The Fed and market forces have pushed mortgage rates to historic lows, yet many homeowners are unable to take advantage because they are blocked from refinancing. This problem could be addressed if the Government merely recognized its existing guarantee on the principal value of a large part of the mortgage market - the mortgages that are backed by Fannie, Freddie and Ginnie - and acted to streamline the refi process. There are 37 million mortgages outstanding whose principal value is backed by the Federal government. When these homeowners apply for a refinancing, the application is subject to a standard underwriting process that involves an LTV test (requiring a property appraisal), an analysis of the borrower's FICO score, and income verification. We estimate a potential average rate reduction of 125 bp on 50% of the outstanding volume of agency-backed mortgages. In the aggregate, the savings amounts to $46 billion per year."

Credit Suisse retorted, "(A huge refi effort) faces significant logistical challenges and potentially disruptive market impact including the need to call on the Fed's balance sheet as a nuclear option. A government-induced refinancing wave will come with ample forewarning in the unlikely case it materializes. We note that all government steps so far have provided ample notice - several months. Simply removing loan level pricing adjustments (LLPAs) is not a panacea. There are additional barriers to refinancing by showing significant differences in prepay speeds across different LTV/FICO ranges that are least affected by LLPAs. These barriers include debt-to-income constraints, documentation constraints, cash constraints (inability to pay for refinancing costs), and originator imposed constraints (for example, restrictive underwriting to mitigate put back risk.) The program would have to be structured as a refinancing program rather than a modification program because the former would cost investors and the latter hits the Agencies."

Still Dealing with the Same Rapid Refi Rumors: The rumor regarding a massive government-sponsored refinancing of over $1 trillion in loans continued to play in the market until it was shut down by a US Treasury official Thursday. The conjecturing, helped along by a blog on Reuters, spooked the market for high-coupon loans (at this point, anything 5.25% and above), and could certainly be construed as a political gambit. Investors, of course, are counting on that high yield for a few years, so a made-up threat of a huge refinance drove prices down by almost .5 in some areas. The loans that have not refinanced may not, so the risk in owning such high dollar price MBS's is headline risk like this. "The administration is not considering a change in policy in this area," said Treasury spokesman Andrew Williams

Politically....

The Congressman who is pushing this "initiative" is up for re-election and has been very outspoken against the Obama administration's handling of the foreclosure crisis. This would lead us to believe that Rep.Cardoza is doing some political pandering to attract positive attention to himself before his Democratic head goes on the chopping block in November.

HERE are the actions already taken by Rep.Cardoza

We have discussed the barriers keeping many homeowners from taking advantage of record low mortgage rates. While our observations and corresponding suggestions are in the same ball park as a rapid refi program (as suggested by Cardoza), we feel a less invasive strategy, one that leads to a return to common sense underwriting guidelines, would be a more responsible way of expanding the pool of qualified homebuyers.