Are the low US home mortgage rates for real?

Oct 11, 2011 17:33 UTC

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
4s (2010) +157 112
4.5 (2009) + 80 227
4.5 (2010) + 100 124
5 (2009) + 29 69
5 (2005) + 5 51
5.5 (2008) - 8 65
5.5 (2005) 0 45
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?


Please remember that an unknown percentage of the high coupon loans have seconds which will need to be resubordinated. What do your numbers look like when you screen out the loans with seconds (and thirds)?

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Profiles in competence: Jesse Jones & Leo Crowley

Sep 6, 2011 19:31 UTC

Alan Boyce, Glenn Hubbard, and Chris Mayer (“BHM”) have published an important paper, “Streamlined Refinancings for up to 30 Million Borrowers,” which makes the case for refinancing all loans – trillions of dollars in face amount — now covered by the housing GSEs, Fannie Mae and Freddie Mac. This proposal breaks-down the evil cartel of banks and GSEs currently blocking more than 30 million American families from refinancing their homes and thus stalling economic recovery.

But this proposal, while admirable, has a cost. Income now flowing to investors and banks who own GSE paper will instead be retained by consumers to the tune of $70 billion annually. If other proposals to compel refinancing of non-GSE mortgages are adopted, the reduction in income to investors, banks and the GSEs themselves as a result of mass prepayments is over $100 billion per year. The banking system made $28 billion in Q2 2011, thus the dilemma.

I use the term “dilemma” deliberately. The GSEs and large banks are still hiding losses on their books and subsidizing these losses by preventing consumers from refinancing their mortgages. It remains only to recognize these losses, restructure insolvent institutions and get on with the business of recovery and growth by refinancing eligible home owners. Let’s ponder two figures from the 1930s who typify the sort of focus and purposefulness required by our government today — Jesse Jones and Leo T. Crowley.

Jones is the better known of the two men, having headed the Reconstruction Finance Corporation during the Great Depression. Jones was a businessman and public citizen first and foremost, a man who saved several banks in his home town of Houston, TX, before he traveled to Washington to serve on the board of the RFC under Presidents Herbert Hoover and Franklin Roosevelt. He also wrote a great book describing his experiences, Fifty Billion Dollars: My thirteen years with the RFC (1932-1945).

Under Jones, the RFC issued debt, purchased commodities, invested equity in solvent banks and closed insolvent institutions, and operated as the merchant bank and receiver of the US government in tandem with the FDIC. While the Fed played a relatively minor financial role during the Depression and WWII, the RFC was where the action was happening, financially and politically. Jones reported to two men: FDR and Senator Carter Glass of Virginia, who helped to create the Fed and served as Treasury Secretary under Woodrow Wilson.

Jones understood that recapitalizing sound banks helped to stabilize communities, but that closing insolvent banks and selling the assets quickly was also a necessary condition for economic revival. In his memoir, Jones tells of meeting with the Maine Trust Company in 1933, which sought an RFC loan of $1 million.

“We in the RFC knew what their situation was,” wrote Jones. “I replied that they needed not $1 million but $4 million, and that they would raise $2 million and the RFC would buy preferred capital of $2 million.” Jones, you see, had his own “stress tests” even in the 1930s.

At first the bankers from Maine Trust Company balked at the idea of raising capital, but Jones persuaded them to go back home and raise the $2 million from the community in a scene right from Frank Capra’s film “It’s a Wonderful Life.” The alternative was closing the bank, and prosecution for the officers and directors. Jones wrote about the episode: “The truth can hurt, but not as badly as uncertainty and fear.”

Leo T. Crowley was appointed Chairman of the FDIC in 1934 and was the agency’s first chief executive. A banker from Wisconsin, Crowley organized the state’s first banking agency in the early 1930s and then went to Washington seeking funds to help 385 of his state’s banks qualify for FDIC insurance. In a 1945 letter to Jones, Crowley recalled “how overjoyed I was to be able to go back home and report that every one of these banks had been accepted for [FDIC] deposit insurance.”

Not only did Crowley get money from the RFC, but he also got a job from FDR and became one of the most important leaders of Depression era. He worked closely with Jones and helped restructure hundreds of banks. Under Crowley the FDIC took on the organizational design it still has today, including insurance, resolutions & receivership, regulation and research. The agency requested and obtained from Congress more time for smaller banks to qualify for permanent FDIC insurance in 1935 and full membership in the Fed in 1937. Crowley knew that “the small bank was really the backbone of the nation’s financial structure” and was then, as it is now, the nation’s largest employer.

Crowley became even more significant than Jones during his years of public service and also as a powerful political ally of FDR. He joined the wartime cabinet in September 1943 and ran the Lend-Lease program that financed much of WWII. Like FDR and most reasonable people, Crowley did not get on with President Harry Truman. At the end of 1945, Crowley cut off the Soviets from the Lend Lease program, provoking the Cold War in Truman’s view, and then returned to private life. Crowley did not write a memoir, but Stuart Weiss wrote a biography in 1996, The president’s man: Leo Crowley and Franklin Roosevelt in peace and war.

The lesson to be taken from Jones and Crowley is one of defining economic problems and acting decisively to deal with these problems so that fear does not conquer all. Today the task is to restructure the largest banks and GSEs, reliquify the economic situation of millions of American home owners, and deal with the financial consequences of that adjustment. If we remember that there is a cost to doing nothing and that prompt action to eliminate insolvency and uncertainty can restart economic growth, then the path ahead is clear.


Lee: It’s not a question of personal qualities, but a question of ownership.

Obama is owned by the banks (they’re “savvy businessmen”). The banks also own the political process in DC, and both legacy parties, as the kabuki on the debt shows.

Obama and the political parties do what they know their owners want. They are one and all criminals and thieves, and criminals don’t enforce the law against themselves.

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