Skip to comments.The Refi Delusion: Instead of refinancing mortgages, government should speed up foreclosures.
Posted on 08/26/2011 9:27:52 AM PDT by SeekAndFind
Providing fresh evidence that it is intellectually exhausted, the Obama administration is flirting with revisiting the mortgage-refinancing market. And like the semi-criminal scam that was the Home Affordable Mortgage Program, this new push is not really about helping out innocent bystanders crushed by the housing crash, but about the hundreds of thousands of market-massacring new foreclosures that are coming down the pipe foreclosures that may be delayed, even if they are not prevented. The Committee to Reinflate the Bubble is in session.
Banks are reasonably eager to refinance certain kinds of mortgages what they lose in interest, they make up in fees and other compensation. But the banks are not keen on refinancing a lot of the mortgages that the government would like to see refinanced: those for underwater borrowers, who owe more on their houses than their houses are worth.
Think of it from the lenders point of view: A loan on a house that exceeds the value of the house is an inherently risky loan. In effect, the banks already have made a bad bet: Theyve got (for example) $250,000 hanging out there for $200,000 in post-crash house. Banks arent going to be inclined to reduce the risk premium on upside-down mortgages. But even with that risk, the bank would rather have a performing $250,000 mortgage on its books than a $200,000 house that it might have a hard time selling if it is foreclosed on, which has to be maintained and insured, and which generates no income between the foreclosure and the sale. So the risk of default ought to encourage many banks to refinance borderline cases: A $250,000 mortgage at 4.5 percent is not as valuable an asset as a $250,000 mortgage at 6 percent, but its still a more valuable asset than that $200,000 house. But most banks have fairly low foreclosure risks: Those mortgages are mostly insured, often by the government, and those insurance premiums already have gone out the door. Most people dont want to default, even though it is easy to do so, so the lenders have a pretty good reason to think theyll win if it comes to a game of mortgage chicken with people who are current on their payments.
There is a way to get banks to agree to a haircut on those mortgage refis: Taxpayers take the haircut for them.
Because the federal government more or less owns Fannie Mae and Freddie Mac, the Obama administration very probably could agree to have those firms bear most of the refinancing losses all without ever going to Congress or offering any transparency in the finances. And that is what is under consideration: another bailout, courtesy of the U.S. Treasury and the taxpayers laboring in its shadow.
How much good would a refi do for these underwater households? To take our $250,000 example (the median price of a new home hit a peak of $262,600 in March 2007), probably not that much. Lending Trees mortgage calculator estimates the difference between a $250,000 mortgage at 6 percent and one at 4.5 percent to be $232 a month. Modifications under other government mortgage-relief programs have similarly run a few hundred bucks a month, and have served far fewer borrowers than their planners had estimated. The old rule of thumb was that the upper limit of a mortgage ought to be 2.5 times income, so a $250,000 mortgage ought to imply a $100,000 household income. (I know, I know, everybody ignored the rules, borrowers above all.) While $232 a month is not nothing, its probably not the difference between solvency and insolvency for a $100,000-a-year household. It is true that in the age of Obama, there are a lot of households that used to earn $100,000 a year and now do not (not to mention the curious case of the missing millionaires), but $232 a month is probably not going to be a sufficient lifeline for nouveaux pauvres, either. And if it were, wouldnt it be simpler to send them checks for $232 than to have the corrupt and bloated beasts known as Fannie Mae and Freddie Mac burrow deeper into the mortgage business, when we ought to be extricating them from it? But a straightforward bailout probably would require passing a law, going to Congress, letting the peoples elected, accountable representatives have a say in things, disclosing who got what on what terms, etc. not Obamas style.
Most of the impetus of our national monkey-with-mortgages agenda has been delaying foreclosures and propping up housing prices along with transferring risk and losses from private parties to the general public. Pushing down mortgage-interest rates encourages higher prices: Borrowers dont pay as much attention to the real price as they do to their monthly payment. But if we really want to stabilize the housing market, we should be doing the opposite: speeding up foreclosures and letting prices fall until they find buyers who want them and can afford them. Thats the only way to let normalcy return to the housing market. The Cato Institutes Mark Calabria points out that Bank of America alone has 200,000 mortgage borrowers who havent made a payment in two years. Extrapolating B of A to the market as a whole, he estimates that (very roughly) 400,000 to 500,000 borrowers havent made a mortgage payment in two years or more. The chance of a borrowers getting caught up on 24 months or more of back payments is slender.
Those refinances would put a few bucks into the pockets of people pressed for money, which the neo-Keynesians at the White House love (stimulus!). But there are two sides to a loan, and those homeowners gain must be somebody elses loss. It probably wont be the banks. Itll be the suckers who in their majority voted for hope and change in 2008.
Kevin D. Williamson is a deputy managing editor of National Review.
Earlier in the Great Obama Recession people were encouraged to just walk away from bad mortgages but rents were cheap. Now you might walk away and end up paying a lot more than you were. That's an incentive to stay where you are and tough it out.
A strictly monetarist examination of the situation without consideration of competing housing options doesn't cut it.
This could change in a thrice if someone imposed rent control but at the moment in most places underwater mortgages still cost less than renting.
Coupon clippers lead rather isolated lives.
Yet another failed response in the Econ 101 Quiz!
If folks Refi their current mortgages what will they do with the “savings”?
1) The breakeven point for most refi’s is 12 months to recover all fees and points. SO THERE WON’T BE ANY “EXTRA CASH”!!!
2) Folks will pay off existing debt, accelarate principal payments, or PUT THE MONEY IN SAVINGS!
3) The reasons for NOT SPENDING remain the same! Obama policies and regulations are strangling productivity and job opportunity!!!!!!
Govt. should NOT speed up foreclosures it should investigate the frauds that have been carried out by the banks who have foreclosed on property that they don’t have clear title to . Lies have been told ,documents forged & passed off in court as real property has been stolen all with the approval/assistance of the political class. They are the ones who approved the mortgage backed securities in the first place.
[real property has been stolen all with the approval/assistance of the political class. They are the ones who approved the mortgage backed securities in the first place.] Uhuh - With a little help from predictably corruptible human nature. This fraud wouldn't have been possible without the complicity of demoralized Useful Idiots at every level of the game - from the Liar Loan borrowers, all the way through those who deliberately gamed the mechanisms of securitization - the common element is DEMORALIZATION and the lack of a moral compass. How'd that happen?
Uhuh - With a little help from predictably corruptible human nature.
This fraud wouldn't have been possible without the complicity of demoralized Useful Idiots at every level of the game - from the Liar Loan borrowers, all the way through those who deliberately gamed the mechanisms of securitization - the common element is DEMORALIZATION and the lack of a moral compass.
How'd that happen?
the author is clueless.
Obviously does not know the first thing about foreclosure process and seperation of pwoers.
The public school system hasn’t been serious about teaching the fundamentals for years .
Yes there is an a great deal of information about what a person needs to know regarding not just home ownership but finance in general, if the students are never taught how to even access this information for reasons of political correctness they are not to blame , those who failed to teach them the basics of life are to blame.
"TO SECURE THESE RIGHTS, governments are instituted among men"
"The merchant uses dishonest scales, he loves to defraud"--Hosea 12:7
The housing market is still searching for a bottom, so let's speed up the process, without a dramatic increase in foreclosures. Once the "bottom" has been found, there's plenty of investor money waiting to get back in.
Loan mods should include write-downs of principal to current market value. The banks will have to take the haircut, and the borrowers will have to agree to make every payment ON TIME for 12-24 months to make the write-down permanent.
Since the banks can borrow from the Fed at 0%, they'll still make money on a 3% mortgage.
I know my ideas aren't favored by those that have struggled to pay their debts on time (as do I). But, "it is what it is".
I'm open to almost anything that will revitalize the housing market.