October 19, 2011

A Boxer-Isakson Refinancing Plan for Banks?

I recently testified in the Senate on the Boxer-Isakson bill, which would streamline mortgage refinancing for those that are current on their mortgage. There would be no credit check, and loan-to-value would not be examined. Fannie Mae, Freddie Mac, and the FHA/Ginnie Mae GSEs would be required to refinance all the loans, both held in retained portfolios or insured.

The purpose of Boxer-Isakson (and similar plans) is to stimulate the economy by unleashing billions of dollars into the economy from mortgage refinancing. I argued that it was a drop in the bucket to the national economy and would hurt investors in agency mortgage-backed securities (MBS) including pension funds.

The latest in the long and winding Attorney General’s settlement against mortgage lenders and servicers in 50 states is a streamlined mortgage refinancing for underwater borrowers. The plan would make refinancing available to borrowers where the home is underwater (worth less than the mortgage) and the borrower is current on payments.

The difference from similar plans, of course, is that the GSE version of “streamlined refinancing” would be done through HARP. This AG plan would target mortgages owned by banks.

Approximately 20% of all U.S. mortgages are owned by U.S.-chartered commercial banks with the remaining 80% held by investors in mortgage-backed securities (both agency and non-agency). CoreLogic has estimated that around eight million homeowners who are “under water” have above-market rates. California has an estimated 2.06 million homes that are underwater. So, California would be the benefactor of lots of loan modifications at the expense of banks.

Is this sound economic policy? Of course not. Like with the Boxer-Isakson legislation, we have no idea if a lower mortgage rate will prevent default (and it probably won’t). If the economic stimulative effect of Boxer-Isakson is very small, then the same applies for the remaining 20% of the mortgage market.