We hear on almost a weekly basis that mortgage interest rates in the US are at all-time lows. The annual percentage rates in mortgage advertisements seem near an historic nadir. The Fed has even begun to purchase long-dated mortgage backed securities (MBS) in an effort to push rates even lower and, hopefully, spur more refinancing activity.
But are these rates real? Are all American consumers, especially low-income borrowers, able to borrow at those low teaser rates? The answer in both cases is no. This is a crucial question, as we have discussed on this blog before. Home mortgage refinancing is the primary conduit for the Fed to provide liquidity to the US economy. In August of last year, I noted:
‘In every Fed easing event during my career in finance (1986, 1992, 1998, 2002), it was the wave of refinancing of debt after the Fed eased interest rates that put permanent disposable income into the hands of households,’ notes a former Fed official who worked in the banking industry for decades. ‘In this last easing, however, FNM, FRE and the TBTF banks have conspired to break the transmission mechanism for monetary policy and are now strangling the U.S. economy to save themselves from past errors.’
Since last year, little has changed. On Friday, Housing Wire reported that “Prepayments, mostly through refinancing, on mortgages backing Fannie Mae and Freddie Mac securities increased substantially in September, higher than what some analysts expected.” In fact, prepayment on FNM 4s surged over 100%, but the real story was the fact that prepayments on higher coupon FNM paper actually fell as shown in the table below.
Fannie Mae 30-Year Prepayments (September):
|Coupon (vintage)||Change in prepayment rate (%)||Amount outstanding (B$)|
|4s (2009)||+ 130||102|
|4.5 (2009)||+ 80||227|
|4.5 (2010)||+ 100||124|
|5 (2009)||+ 29||69|
|5 (2005)||+ 5||51|
|5.5 (2008)||- 8||65|
|6 (2007)||- 4||62|
|6 (2006)||- 8||43|
|6.5 (2007)||- 13||16|
|6.5 (2006)||- 9||17|
Source: Fannie Mae/Absalon
While most of the business currently being written by banks and the GSEs is related to refinancing, the vast bulk of the loans are being written against relatively low coupon loans. Home owners with older, high coupon loans are largely excluded from the refinancing activity.
More, two of every three mortgage refinancings done by banks and guaranteed by the GSEs since 2008 have gone to higher income households. Low income families who need the benefit of lower rates are mostly locked out. One key telltale in the Fannie data about the discrimination against low income borrowers: The average loan size of the older, high-coupon loans is almost half that of new loans.
Notice that virtually all of the increases in prepayments were recorded in FNM 4s and 5s, while prepayment speeds actually fell for the older, higher coupon loans. The higher income households who held high coupon loans from the 2008 and earlier time frames have largely refinanced, leaving only the low income borrowers trapped by the GSEs and investors in MBS who do not want these needy American families to refinance.
Remember that the Fed is already diverting more than half a trillion dollars a year from savers to the banks through low interest rates. The behavior of the GSEs and the top four banks – JP Morgan, Bank of America, Citigroup and Wells Fargo – which prevent lower income Americans with performing loans to exercise their contractual right to refinance borders on the criminal. But in terms of public policy, the blockade by the GSEs and the zombie banks is blocking the Fed’s efforts to reflate the consumer sector and help the US economy.
Treasury Secretary Tim Geithner has stated that the Obama administration is moving forward with plans to help more homeowners refinance out of higher rates. But Congress and members of the media should ask Secretary Geithner why he has been dragging his feet with respect to forcing the GSEs to refinance all of these older, high coupon loans to help the most needy Americans. The fact that Geithner and Federal Housing Finance Administration chief Ed Demarco are responsible for blocking more than 30 million American families from refinancing their mortgages is an outrage.
What should be done? In a presentation to the Mortgage Bankers Association in Chicago the other day, Alan Boyce of the Absalon Project listed a number of steps that Geithner and the White House need to embrace. Obama should require FHFA to direct GSEs to use all tools available to stimulate more home refinancings. Specifically:
•Eliminate loan level pricing adjustments for the refinancing of ALL loans currently guaranteed by the GSEs
•Eliminate the 25bp “Adverse Market Fee” imposed after the government takeover of Fannie and Freddie.
•Eliminate appraisals and paperwork as part of a new “Super-Streamlined” refinance program
The key requirement is that the borrower be current on the existing mortgage that is guaranteed by the taxpayers. Boyce believes that following this approach will have big benefits. Some 25 million new refinancings from 32 million tax payer backed loans will reduce mortgage payments of about $51 billion. Lower income borrowers will get over half of these savings.
And there are big benefits for the banks. Underwater borrowers at greatest risk of default will get some financial breathing room. Improved labor mobility provided by refinancing will reduce unemployment and also help to lessen the chance of a second wave of loan defaults. And, most importantly, the single biggest obstacle to the Fed’s efforts to add liquidity to the consumer sector will be removed. The hour is late, but prompt action now can make a big difference to the economy in 2012 and beyond. Does President Obama have the courage to act?