One more try at the Great Refi

February 12, 2013

By Matthew Goldstein

Don’t be surprised if President Obama includes a line or two in his State of Union address this evening about the need for a plan to allow millions of struggling homeowners whose mortgages are packaged into so-called private label mortgage-backed securities to get a chance to either refinance their loans or restructure them.

The Washington Post is reporting today that mortgage refinancing may be one of the laundry list of items Obama will talk about tonight. And for several months now, investors in private mortgage-securities–deals issued by Wall Street banks and financial firms and not guaranteed by Fannie or Freddie–have been quietly bracing for the Obama administration to move forward with a new refinancing effort.

Up until now, the federal government’s main attempts at trying to help homeowners take advantage of the Federal Reserve’s efforts to keep pushing interest rates to zero has been to prod banks and mortgage servicers to refinance home loans held in so-called agency debt guaranteed by Fannie and Freddie. But programs like HAMP and HARP have provided little relief to the millions of homeowners whose loans are held in private label securities.

In other words, the Fed’s efforts to buy up agency mortgage debt to keep rates low has done little to provide relief to borrowers whose loans are packed in private mortgage securities and they owe more money on their loans than their homes are worth. These borrowers have not been able to take advantage of record low mortgage rates, even as many of the private label bonds their loans are bundled into have soured in value.

As my colleagues  Samuel Forgione and Katya Wachtel have pointed out that’s been good news for investors in private mortgage bonds, including hedge funds, especially mortgage funds, but not so much for the actual borrowers.

The failure of the federal government’s effort to help the millions of underwater borrowers who are keeping up with the mortgage payments gave rise to one of last year’s more controversial ideas in the mortgage market–using the local government’s power of eminent domain to seize distressed mortgages and rewrite them. But the idea peddled by Mortgage Resolution Partners and first reported  here on Reuters by my colleague Jennifer Ablan and I  quickly sparked a firestorm of protests from bond investors that the plan would set a bad precedent, discourage mortgage underwriting in communities that embraced the idea and would unfairly profit MRP’s financial backers at the expense of investors in private mortgage-backed bonds.

MRPs proposal appears to be dying, now that local officials in San Bernardino County in California–the first group to seriously consider eminent domain–have decided not to proceed with the plan. To some degree, MRP never may have been the right messenger for pushing a solution to the underwater mortgage problem given the talks with San Bernardino officials began in secret and as Jenn and I reported over a year ago, the initial sales pitch touted the firm’s political connections above all else.

Still, there always has been merit to do something for underwater borrowers who have kept up with their monthly payments yet have nowhere to turn when it come to taking advantage of low rates.

If Obama goes forward with a proposal its not clear how much opposition it will run into on Capitol Hill or from bond investors. But as always been the case, it’s still hard to see the U.S. economy soaring as long as too many consumers are still weighed down by crushing debt.

 

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