The next big damage control program for housing markets is likely to involve Fannie Mae and Freddie Mac, which may soon be asked to refinance millions of underwater homeowners into lower interest rate loans and approve bulk sales of homes they’ve repossessed to investors who would convert them into rentals.
Fannie and Freddie’s regulator, the Federal Housing Finance Agency (FHFA), the Department of Housing and Urban Development (HUD), and the Treasury Department announced on Aug. 10 that they are exploring options for allowing bulk sales of homes to investors and converting Fannie, Freddie and Federal Housing Administration real estate owned properties (REOs) in some markets into rental properties.
FHFA wants to hear about any ideas for sales, joint ventures and other strategies that would benefit Fannie, Freddie and FHA REO disposition programs, with a Sept. 15 deadline.
Although there’s been no official announcement, the Obama administration is also said to be considering whether to allow millions of homeowners whose mortgages are backed by Fannie and Freddie to refinance in order to take advantage of lower interest rates — even if they owe more than their homes are worth.
An existing program designed to allow just that — the Home Affordable Refinance Program (HARP) — has helped only about 50,000 underwater borrowers, and administration officials told the New York Times that they are considering changes that would make more homeowners eligible for the program.
National Mortgage News reported Monday that it had confirmed that the Treasury Department and HUD are reviewing HARP and the FHA’s little-used short refinancing program, with the goal of increasing participation.
One option for boosting participation in the HARP program would be to raise the existing 125 percent loan-to-value cap to 150 percent, mortgage executives told the publication. Fannie and Freddie could also help boost HARP’s effectiveness by reducing fees charged to borrowers, they said.
Those changes would not have to be approved by Congress. But FHFA — which has been concentrating on minimizing Fannie and Freddie’s losses since they were placed in conservatorship in 2008 — might object.
Allowing millions of borrowers who have been unable to refinance to take advantage of lower interest rates because they are too far underwater could have serious implications not only for Fannie and Freddie, but for investors who hold mortgage backed securities (MBS) backed by the government-sponsored enterprises (GSEs).
The Wall Street Journal reported that speculation that the government could soon force Fannie and Freddie to allow mass refinancings had investors selling agency MBS backed by loans with rates at 6 percent and higher.
Analysts told the Journal that it’s unlikely that the Obama administration will make low mortgage rates available to all underwater borrowers, because such a move would be subject to legal challenges and could spook MBS investors who are the ultimate source of funding for 90 percent of home loans.
The New York Times reported that some officials are worried that mass refinancings might increase the cost of borrowing for both homeowners and the government.
Bond analysts with BCA research said the potential harm to MBS investors — including China — means the odds of a new government-mandated refinancing program are "considerably less than 50 percent," Barron’s reported.
"The appeal of allowing (middle-class) American homeowners to take advantage of ultra-low mortgage interest rates is obvious," said Randall Forsyth, editor-in-chief of Barrons.com, in an opinion piece. "The massive costs — which essentially would involve a transfer of wealth to homeowners from investors by changing the rules unilaterally and after the fact — are less apparent."
Cut the rate on a $400,000 mortgage from 6 percent to 4 percent, and the monthly payment drops from $2,400 to $1,900, Forsyth noted — "freeing up $500 a month that could be spent elsewhere. It would be equivalent to a tax cut that would not increase the deficit."
But many of the the investors who would be hurt by such an initiative are also middle-class Americans, Forsyth said, who have money invested in MBS mutual funds run by companies like Pimco, BlackRock, Vanguard, and Fidelity.
If those investors also "get hit with losses that further batter the value of their beleaguered 401K accounts or slash their already decimated retirement income, the political calculus may be less clear," Forsyth concludes. "This free lunch could turn out to be particularly costly, which makes it less likely."